You certainly can use your trade-in as a down payment. In fact, it’s highly recommended you do so if you’re looking to save money on a new car loan and have equity in your trade-in. But, what if your loan isn’t paid off?

Trading in a Car With Negative Equity

So, how does a trade in work when you still have a loan? It depends on your equity situation. Equity is the difference between your vehicle’s actual cash value (ACV) and the amount you owe on the loan. For example, if your vehicle’s ACV is $5,000 and you owe $3,000, you have $2,000 in equity that can be used as a down payment toward the new car purchase. If you end up getting a negative amount when you do this, this means you have negative equity.

Your Options

Can I Use My Trade-in as a Down Payment on a Car Loan?When faced with negative equity in a trade-in, you’ll need to weigh all of your options before heading to a dealer. There are three main courses of action you can take when dealing with an underwater loan:

  1. Pay off the difference – This is ideal if your negative equity amount isn’t too high and you have the cash. Not everyone will be able to do this, so make sure you can afford to pay it off without tapping into your savings too much before you trade it in.
  2. Roll it over – The next option is to roll over the negative equity into the new loan. Not all lenders are willing to do this, so make sure you ask if this is an option. The downside to rolling over negative equity is that you’ll be increasing the amount of your new loan. In other words, you’ll continue paying off the negative equity, along with the new loan.
  3. Wait it out – The last – and often best – option is to wait until there’s no negative equity. Waiting until your trade-in is paid off or the loan reaches a point where there is equity will make your next car purchase easier. You won’t have to worry about the old loan, and can get ready to finance a new vehicle.

Bottom Line

You can use a trade-in as a down payment if the car is paid off or you have equity. If you have negative equity, it doesn’t necessarily mean you won’t be able to trade it in. Just because one lender won’t let you trade it in, doesn’t mean another won’t. Remember, sometimes, the best course of action is to wait it out until you at least have equity in your current vehicle.

Even if you don’t have a vehicle to trade in, Auto Credit Express can still help you find a local dealership that can get you financed. We work with a nationwide network of dealers that are trained in the handling of challenging credit situations. Don’t stress over car buying, get started by completing our free and easy car loan request form today.