It can be difficult trading in a vehicle if you have poor credit and you're financing the next one with a bad credit auto loan.
Equity in your trade-in
Equity is the difference between a vehicle's value and what is owed on it. During the appraisal process, the dealer assigns a value to your car based on its age, condition and mileage.
Customers are often surprised that their car isn't worth as much as they thought it would be, because they don't take into account any reconditioning costs. A dealer usually has to detail a vehicle and might even have to replace items. These costs reduce its trade in value.
The next step is to determine a vehicle's trade equity. If it's paid off, the entire appraised value is considered equity. Trading in your current car can help reduce the interest expenses of a bad credit auto loan.
But if a vehicle isn't paid off:
- The appraised value is more than what is owed. The difference is its trade equity.
- The appraised value is less than what is owed. Then the difference is known as negative equity.
With a negative equity trade, you'll need to come up with cash to meet the down payment requirements, plus more money down to cover the amount of the negative equity.
It becomes even more expensive because of the high interest rates associated with poor credit auto loans.
Generally speaking, you should only consider a negative equity trade if it will save you money. If not, all you'll be doing is adding to your debt.
At Auto Credit Express we help people with bad credit find a dealer that can give them their best chance at an approval for a new or used car loan.