Using a trade in as a down payment for a bad credit auto loan will only work if it meets certain rules.
Trade equity is the term used to describe the difference between what your car is worth and how much you still owe on it. Once the dealer has test-driven, performed a physical inspection and consulted auction reports, a trade in value is then assigned.
Many customers are surprised when they find out that their car isn't worth as much as they thought. This is because the dealer has to consider reconditioning and detail cost, which may include replacing parts. Those are all costs that will reduce a car's trade in value.
If your car is not paid off, then it's equity position is one of the following:
- Trade Equity - If the trade value is more than what you owe, the difference is trade equity.
- Negative Equity - If the trade value is less than what you owe, then the difference is known as negative equity.
Lenders often allow customers to trade in a car with negative equity, but keep in mind that the new financing will include money owed for both the old and new cars, unless you provided enough cash down to cover the entire remaining loan balance of your trade-in.
So should you ever do a negative equity trade? Possibly, but you should only do it if it will save you money in the long run. For instance: Your current vehicle is out of warranty and necessary repairs will cost you more than the increased interest expenses of the new loan.
So remember, trading in your current car when it's paid off or when you have trade equity will help reduce the amount of interest that you will pay on a bad credit auto loan.
But if you have negative equity in your current vehicle, trading in your car might only make sense if you are avoiding costly repairs and you can offset the increased interest expense.
Here at Auto Credit Express, we specialize in helping people with bad credit find a dealer that can give them their best chance at an approval for a bad credit auto loan.