BLOG: What is Equity, and How Equity Affects Your Purchase ?
What Is Equity?
Equity is derived from the value of your current vehicle that you plan to trade in and how that value is applied to the purchase of your potential new vehicle. The trade in value will be based on current market, the condition of the vehicle, mileage, etc. The problem with numerical value is it can be negative, or positive. So, when you look at the equity your vehicle will bring, it is going to be a separate number in the equation of the purchase. It’s not just what the vehicle is worth; it is that, plus what is still owed on the vehicle. For instance, if you have a vehicle that is worth $5,000, and you owe $10,000, you now have negative equity of $5,000. If that same vehicle is worth $5,000, and you owe $0, you now have positive equity.
How Does Equity Work?
When equity is applied to that purchase, whether you are financing or paying cash, it will either add to the bottom line, or deduct from the bottom line, the same way cash will. Some states will not tax you on the trade-in value (Texas is an example of this), so when applying positive equity, it can be a tax benefit as well.
So now, let’s say your new potential vehicle is $20,000. You have $5,000, negative, from our first scenario. Your sub total, before tax title and license, is going to be $25,000. In scenario B, where that equity is positive, your sub total will be $15,000. So, now, instead of being taxed on $20,000, you’re being taxed on $15000. Instead of financing or purchasing $20,000, you’re financing or purchasing $15,000. This can help lenders who may be on the fence about an application. So, even if it’s an old vehicle you think isn’t worth anything, it may be of more benefit to use that as a trade in, since you can apply that as equity. We’ve had a customer trade in 3 old cars, just to get approved for a new loan. You can get creative with this!