You can certainly use your trade-in as a down payment on another car. It makes a lot of sense to ease the strain of a cash down payment by using the equity in your current vehicle. But what if there’s no equity , or you still owe on your current car? Have no fear – there are plenty of options when it comes to making a down payment on an auto loan.
Trade-Ins with Negative Equity
One of the most common reasons for trading in a vehicle is to use its value as a down payment. However, situations can arise where your current car is worth less than what you owe the lender. This is called having negative equity, and it’s not the best position to be in when you’re looking to trade up to a newer vehicle.
When you have negative equity, also referred to as being underwater, you don’t have any value that can be used as a down payment. In fact, you’re most likely going to have to pay your current lender the difference between the car value and the loan balance.
This doesn’t leave you much choice for a down payment unless your new lender lets you roll over the negative equity amount into your new loan. This option isn’t always available, especially if you have bad credit.
Even if it is, we recommend that you avoid doing so because rolling the negative equity into a new loan means paying more in the long run. This increases the amount of your loan, which means you also pay more in interest charges over the loan term.
3 Other Down Payment Options
If you can’t use your trade-in to cover the down payment requirement, you have three other options to keep in mind:
- Cash – If trade-in equity isn’t an option, you can make your down payment in cash. Lenders, especially subprime lenders that deal with bad credit auto loans, like to see borrowers investing in their own success by putting money down. In fact, if you need a car loan from a subprime lender, you're typically required to make a down payment. If you’re looking to get cash for your trade-in, our partner can help you here.
- Combination – Perhaps there’s equity in your trade-in, but you still owe your current lender. In this case, the lender gets paid first and you’re left with the difference between your vehicle’s value and the loan balance. If this isn’t enough to cover the down payment requirement on another car, you can use your trade-in combined with cash to meet it.
- Credit Card – This method is extremely rare, and may not be available from all lenders. You probably won’t be able to put your entire down payment on a credit card, but some lenders may allow at least a portion to be paid like this. We recommend thinking about this before you do it. Just like rolling over a negative equity balance, paying a down payment with a credit card means you’re going to end up paying more in interest charges.
With all the options available for making a down payment on your next auto loan, you don’t have to worry whether your trade-in covers it completely, but it certainly helps if it does!
Finding the Dealer for Your Next Car
When you have a trade-in with plenty of equity and need a down payment on your next vehicle, it can really take the pressure off of your car loan experience. Knowing that you don’t have to come up with cash to meet a lender’s down payment requirement is certainly ideal, but this isn’t the case for everyone.
When you don’t have a trade-in, it can be daunting to have to think about having to save for a down payment on your next vehicle. If you’re getting a bad credit auto loan, you might not need to come up with as much money as you think.
Most subprime lenders have a minimum down payment requirement of $1,000 or 10% of the car’s selling price, whichever is less. Knowing this, you can shop for an auto loan with confidence – but where do you start? At Auto Credit Express, of course!
We work with a large network of special finance dealerships all across the country that have the lending resources available to work with people in many types of credit situations. Don’t wait any longer to find a dealer in your area. Simply fill out our free car loan request form, and we’ll work to match you with a local dealership!