Trading in a car on a bad credit auto loan is something that you can absolutely do. One thing you have to be careful of, however, is trading in a car in which you have negative equity.
When to trade in your car
As anyone at Auto Credit Express will tell you, whether or not you have equity in your trade-in can make all the difference in the world. By equity, we mean how much your car is worth compared to how much you owe on it.
If your current car is paid off, or if its appraised value is more than what you owe on it, you have “equity” in your vehicle. On the other hand, if you owe more on your current car than it appraises for, you have “negative equity” in it – sometimes called “upside down.”
A few years ago, most subprime lenders would not allow you to trade in a car with negative equity unless you could come up with enough cash to offset the negative amount. Even today, while some lenders will consider it, the tightening credit market has made many lenders back off on trades with negative equity – especially subprime lenders. But even if the lender allows you to do this, is it a good idea?
When does it make sense to do this?
If you take a good look at the situation, it only makes sense to roll negative equity into a new car if you have no other alternative. What you are essentially doing is paying for two cars at the same time – your old car on top of your new car. This is compounded by the fact that the interest rates on bad credit car loans are high. So you’re paying a high interest rate on two cars, not just one.
It only makes sense if the car you are currently driving is not reliable or the new car you will be buying has something like better gas mileage or insurance rates that will help offset the payment increase. It also helps if you have some cash to help offset the negative equity.
Will the bank do it?
That depends upon the situation. Most subprime lenders use either Kelley Blue Book or the NADA guide as a benchmark (as a rule, western banks use Kelley, while Midwest and eastern banks use NADA). Lenders will usually allow the dealer to sell the car for 15% over the trade in price, although many subprime lenders have reduced this amount to 10% in the past year, due to the economy.
What about the dealer?
Again, it depends on a number of things. If the difference between the dealer’s selling price and 10%-15% over the trade value covers the negative equity, the seller will probably go for it. If there isn’t that kind of room in the deal, you can either try and negotiate a lower price or move to a different vehicle. In some cases, the dealer can call the bank to try and raise the 15% cap. But again, this is becoming more difficult in today’s economy.
The Bottom Line
It is never a good idea to roll negative equity into another car. Because of the high interest rates of a bad credit car loan, it can be especially painful. By putting cash down in addition to your trade in, you can cut down on the amount of negative equity.
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