Question
You have a car that is valued at $12,000. The balance that you owe on the car loan is $7,000. You lose your job and can not afford to make payments on your loan so you sell the car for $9,000 and pay off the loan. Explain how your net worth is affected by your actions.
Answers
GPT-4o mini
To analyze how your net worth is affected by selling your car and paying off your loan, let's break down the situation.
1. **Current State:**
- **Value of Car:** $12,000
- **Loan Balance:** $7,000
Your net worth can be calculated as:
\[
\text{Net Worth} = \text{Assets} - \text{Liabilities}
\]
In this case, your assets (the car's value) is $12,000 and your liabilities (the loan) is $7,000. Therefore, your net worth is:
\[
\text{Net Worth} = 12,000 - 7,000 = 5,000
\]
2. **After Selling the Car:**
- **Sale Price of Car:** $9,000
- After selling the car, you pay off the loan entirely:
\[
\text{Remaining Loan Balance} = 7,000 - 7,000 = 0
\]
Now, your assets change:
- You have $9,000 from selling the car.
- Your liabilities are now $0 (since the loan is paid off).
Thus, your new net worth is:
\[
\text{Net Worth} = \text{Cash from Sale} - \text{Liabilities} = 9,000 - 0 = 9,000
\]
3. **Summary of Changes:**
- **Original Net Worth:** $5,000
- **New Net Worth After Sale and Paying Off Loan:** $9,000
By selling the car for $9,000 and paying off the $7,000 loan, your net worth increases from $5,000 to $9,000. Therefore, even though you lost your job and could no longer make payments, selling the car and eliminating the debt improved your net worth by $4,000. In this scenario, you effectively turned a depreciating asset into cash while also eliminating a liability.
1. **Current State:**
- **Value of Car:** $12,000
- **Loan Balance:** $7,000
Your net worth can be calculated as:
\[
\text{Net Worth} = \text{Assets} - \text{Liabilities}
\]
In this case, your assets (the car's value) is $12,000 and your liabilities (the loan) is $7,000. Therefore, your net worth is:
\[
\text{Net Worth} = 12,000 - 7,000 = 5,000
\]
2. **After Selling the Car:**
- **Sale Price of Car:** $9,000
- After selling the car, you pay off the loan entirely:
\[
\text{Remaining Loan Balance} = 7,000 - 7,000 = 0
\]
Now, your assets change:
- You have $9,000 from selling the car.
- Your liabilities are now $0 (since the loan is paid off).
Thus, your new net worth is:
\[
\text{Net Worth} = \text{Cash from Sale} - \text{Liabilities} = 9,000 - 0 = 9,000
\]
3. **Summary of Changes:**
- **Original Net Worth:** $5,000
- **New Net Worth After Sale and Paying Off Loan:** $9,000
By selling the car for $9,000 and paying off the $7,000 loan, your net worth increases from $5,000 to $9,000. Therefore, even though you lost your job and could no longer make payments, selling the car and eliminating the debt improved your net worth by $4,000. In this scenario, you effectively turned a depreciating asset into cash while also eliminating a liability.