All lenders – even subprime lenders who work with customers with bad credit – accept trade-ins as part of a down payment on a car loan. However, people need to be cautious if they still owe on the loan and have negative equity.
Trade-ins as a Down Payment
For people who have a car and are going to take out an auto loan, trading your current old vehicle is a convenient solution. The dealership’s mechanics will inspect the trade-in vehicle, 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 $1,000 or 10 percent of the car’s selling price in cash, trade equity, or a combination of both.
What if I Still Owe on My Trade-in?
If your trade-in vehicle is paid off, its entire value can be used toward the purchase. If you still owe on your vehicle, its 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 have equity in it but still owes on the vehicle, the dealer will accept the trade, pay off the previous lender, and apply the difference as the down payment on your new car. For example, if you still owes $5,000 on a vehicle worth $7,000, the $2,000 difference can go toward the down payment. However, the trade-in process can become difficult when a borrower owes more on the loan than their vehicle is worth – known as having negative equity.
Trading In My Vehicle with Negative Equity
Negative equity is a problems during the trade-in process because the car buyer is always responsible for the difference. For example, a borrower owes $8,000 on their trade-in 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, you may want to think long and hard before doing so. going this route raises the loan balance, which leads to higher monthly payments and increased interest charges – 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 it’s paid off or there is equity. 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.