Can I Use My Trade-in Vehicle on a Bad Credit Car Loan?

Yes, Buy Here Pay Here Dealers accept trade-in vehicles as part of a down payment. However, people need to be cautious if they still owe on the loan and have negative equity.For people who are going to take out an auto loan, using a trade in vehicle is a convenient solution. The dealership will inspect the trade-in vehicle. Next they will run a CARFAX, and determine its actual cash value when making an offer. The trade-in’s value, can go toward the new purchase as a down payment. For consumers with less than perfect credit, this is a great way to meet a lender’s down payment requirement. In most cases, bad credit lenders require a down payment of 10 percent of the car’s selling price in cash. Another consideration is trade equity, or a combination of both. We suggest reading the article “How Trade-in Car Prices Are Determined” to get an idea of how dealers come up with a price.

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What if I Still Owe on My Trade-in Vehicle?

If your trade-in vehicle is paid off use entire value toward the purchase. If you still owe your vehicles equity determines how your purchase moves forward. Equity is the difference between what a car is worth and the loan balance. When a customer trades in a car and has equity but still owes on the vehicle. The dealer will then accept the trade, pay off the previous lender. You dealer with apply the difference as the down payment. For example, owes $5,000- vehicle worth $7,000, the $2,000 difference can go toward the down payment. However, when a borrower owes more on the loan than their vehicle is worth the trade-in process can become difficult  – known as having negative equity.

Trading In My Vehicle with Negative Equity

The buyer is always responsible for the difference of Negative equity. For example, a borrower owes $8,000 on their trade-in vehicle but it’s only worth $6,000. This means they’re facing $2,000 of negative equity, and the difference isn’t just going to disappear. Customers either have to pay it off or can roll it into the new loan, which can be a costly decision.

Keep in mind, a lender may not even let a borrower (especially if they have credit issues) trade in a car with negative equity unless they have money to cover it out of pocket. Problem is now the alternative is rolling the difference into the new loan this raises the loan-to-value ratio, which can cause a loan to fall outside the allowed requirements and lead to being denied. When you find a lender where negative equity can be rolled over use caution. Going this route raises the loan balance, which leads to higher monthly payments and increased interest charges. Truly a costly move for those with less than perfect credit who receive higher interest rates. Also, this immediately creates more negative equity in the new loan, so the same problem may arise in the future.

The Bottom Line

As the Car buyer, even if you have bad credit, can use your trade-in vehicle as all or part of your down payment. If you have negative equity, we recommend to avoid trading in your vehicle unless it they can cover the balance out of pocket. Financially speaking, it’s smarter to wait until you have built equity or paid off the loan.
If you’re facing less than perfect credit and need a car loan, Highway Motors can help you get financing whether or not you have a vehicle to trade in. We work with an in-house financial company equipped to handle your unique credit situations.

Get started by submitting our secure auto loan request form today.


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