Using your current car as a trade in and down payment on a bad credit auto loan will work only if it meets certain requirements
Car loans with bad credit
Unless it’s paid off, if you’re planning on trading in your current vehicle and financing with no credit auto loans you may want to keep on reading.
We’ve seen this situation before here at Auto Credit Express, where we’ve been working in bad credit car sales for more than twenty years. During those years we’ve helped hundreds of people finance a bad credit car.
We show buyers how to avoid a tote the note dealer (outside our retail areas you can fill out our online auto loans application) and educate them on the loan process (to prevent repossession) which includes the importance of trade equity.
Trade equity is the difference between what a car is worth and how much is owed on it.
During the appraisal process, the dealer will assign a value to your car. Many customers are surprised that their car isn’t worth as much as they thought it would be. This is because the NADA and Kelley Blue values that most consumers have access to should only be thought of as a guide. Auction values that are available only to dealers are more up-to-date. In addition, the dealer might also have to replace tires and recondition and detail it. Those are all costs that reduce a car’s trade in value.
Unless the vehicle is paid off, the next step is to determine its trade equity. If your car is paid off, the entire trade value is equity. If the trade value is more than what you owe, the difference is trade equity. If, however, the trade value is less than what you owe, then the difference is known as negative equity.
Dealing with negative equity
Since most problem credit lenders require a down payment, you’ll need enough trade equity for the down payment. If it isn’t enough, the difference can be made up in cash.
But if you have a negative equity trade, you’ll need to come up with a cash down payment plus enough to cover the negative equity in order to meet the down payment requirements of the lender.
Even if a lender allows you to trade in a car with negative equity without covering the balance owed – and this is a big “if” – the situation won’t be good, because you end up paying finance charges on two cars. When you’re dealing with the high interest rates of a problem credit auto loan, this can become very expensive.
When to do it
Should you ever do a negative equity trade? Possibly, but only do it if it will save you money. There are two situations in which trading in a vehicle with negative equity could end up saving you money in the long run.
- Your current vehicle is out of warranty and necessary repairs will cost you more than you’ll spend on the increased expenses of the new loan
- Your current vehicle costs a lot more to drive (say 10 mpg versus 30 mpg on the new car) and the added expenses are offset by the savings in fuel costs.
If neither of these situations exists, you end up paying for two cars at the same time – not a good thing.
As we see it
Trading in your current car if it’s paid off or you have equity in it will help reduce the amount of interest charges on a bad credit auto loan.
If you’re negative in your current vehicle, trading in only makes sense if you’re trying to avoid costly repairs or if you can offset the increased expense with a savings in fuel and/or insurance costs.
At Auto Credit Express we have helped thousands of people with bad credit buy a car and reestablish their car credit at the same time through our network of affiliate dealers.
So if you are serious about getting your auto credit back on track, you can begin by filling out our secure online bad credit car loan application now.
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