To use your equity or not!
It is time to upgrade your current equipment or car and the dealer tells you that the trade in worth some money (equity). What do you do with it?
Typically, people often only finance the cost of the new item less the amount offered by the supplier for the trade-in. For example, if the new item costs $50,000 and the trade-in offer is $10,000, the customer will very often finance only the balance of $40,000, but is this best for your circumstances?
In a perfect world, when you have no other debt or cash flow issues, that is probably the right thing to do. But if you have other debt, particularly high interest debt such as credit card(s), it may be a much better option to use the equity (i.e. the cash for your trade-in) to clear or at least reduce any high interest debt. With interest rates against motor vehicles and equipment currently at an all-time low, it is clearly the best option, remembering that the interest payable on goods for business purposes is tax deductible.
Or does your business have some big expenses coming up, superannuation bill, and tax bill, want to do some marketing etc – could the equity be used to help pay these?
Even if the new vehicle or other item is for personal use (non-business) there is likely to be a similar opportunity to clean up any personal high interest debt you may have and thus only have the comparatively low-rate debt to repay against your vehicle.
Always try to get rid of the highest interest rate debt first - that strategy can save you a lot of money in both the long and short term.