When you have bad credit and you’re looking for your next auto loan, you’re going to need a down payment. Thankfully, a trade-in can help meet this requirement.
Trade-Ins and Down Payments
Bad credit lenders (subprime lenders) generally require that bad credit borrowers have a down payment of at least $1,000 or 10% of the vehicle’s selling price, often whichever is less. These subprime lenders use more than your credit score to determine eligibility for a car loan, and a down payment shows that you’re committed to completing the loan.
Luckily, a trade-in can help you meet this requirement. The trade-in vehicle must be paid off or have equity, however, in order for it to be used as a down payment on your next auto loan. A down payment or a trade-in can be beneficial to anyone financing a car – not just bad credit borrowers.
Let’s explore the benefits of trade-ins as a down payment, and how to determine what your trade-in’s value might be.
Benefits of a Trade-In as a Down Payment
If your old vehicle is paid off or has equity, meaning you owe less on your loan than the vehicle’s actual cash value, then you can put that equity toward your next car loan.
Using your trade-in as a down payment can:
- Help reduce the negative equity in your new car
- Reduce your monthly loan payment
- Lower the amount you pay in interest charges
When you finance a vehicle, there’s a risk of negative equity, especially if it’s a new vehicle. New cars lose a great deal of value in the first year due to depreciation, generally around 20%. Most borrowers who finance new vehicles find themselves in negative equity during the first few years of their loans. However, the more money you put down, the sooner you’ll be out of negative equity. In fact, a trade-in with a lot of equity could help you stay on pace with the initial depreciation of the car, and allow you to be in an equity situation early in your loan.
When you use a trade-in toward an auto loan, you’re borrowing less. Car loans are installment loans, meaning you pay back the balance, plus interest (the cost of borrowing money), over a fixed time period.
Here’s how a down payment could help you if you finance $15,000 for 60 months with a 12% interest rate. In this scenario, your monthly payment is around $334. If you get $2,000 for your paid-off trade-in and use it as a down payment, you’re only financing $13,000, making your monthly payment around $289.
Since you’re borrowing less, you also don’t have to pay as much in interest charges. Auto loans are almost always simple interest loans, meaning you’re charged interest daily, based on the loan balance. Using the example above, with no trade-in, you pay around $5,020 in interest. With the trade-in, you only pay around $4,351 in interest charges. That’s a savings of about two and a half car payments!
As you can see, using a trade-in as a down payment has many benefits. It gives you extra disposable income month to month, and also saves you money in the long term. But how do you find out if your trade-in can help you meet the down payment requirement?
Does My Vehicle Have Equity?
You can estimate the trade-in value from the comfort of your home. There are valuation services available online, such as Kelley Blue Book and NADAguides. You simply enter in the make and model of the vehicle, the mileage, and the overall condition. Be honest, though, since the dealership will likely thoroughly inspect your trade-in, and the true cash value of your car is going to be determined by the dealer.
If you still owe on your trade-in, check the loan balance. Once you’ve estimated the value of your vehicle, compare it to your loan balance. If you owe less than the estimated value, that’s great, because it means you have equity. If the opposite is true, you have negative equity. A car with negative equity won’t help you with the down payment requirement of subprime lenders.
With negative equity, you can either wait it out until you no longer are underwater, or simply pay the difference in cash. Both can be challenging, and if you can’t do either right now, you may be able to roll the negative equity into your next auto loan.
However, this means you’ll be financing more with a higher monthly payment, you’re going to pay more in interest charges, and your loan term may have to be longer, too. You also start your new loan with even more negative equity.
Looking for a Dealership With Bad Credit Lending Options?
If you’re ready to trade in your old car on your next auto loan, we want to help.
At Auto Credit Express, we’ve created a network of dealerships that work with subprime lenders. We take the hassle out of driving around looking for a dealer. To get started, fill out our free, secure, and online car loan request form.