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Can I Trade My Car In With Bad Credit

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Negative Equity And Bad Credit

How to buy a car with Bad Credit. Car buying Tips

Normally, a trade-in can be applied to a car purchase as part of your down payment. But when your trade-in has negative equity, it’s the exact opposite. Instead of having a down payment, you are bringing debt to the table.

When you have bad credit, this can hurt your chances of getting approved for another auto loan. This is because the negative equity isn’t going to just disappear. You either have to pay the difference out of pocket or roll it over into the new loan.

Subprime lenders are hesitant to lend a loan amount that is more than the value of the car you are trying to finance. When you add negative equity to the mix, you are asking them to do exactly that. This means that if you are trying to trade in a car with negative equity, you are actually hurting your approval chances.

Trading In With Negative Equity

Negative equity creates problems during the trade-in process because the car buyer is responsible for the difference.

For example, a borrower owes $7,000 on their trade-in but it’s only worth $5,000. This means they’re facing $2,000 of negative equity, and the difference isn’t just going to disappear. Buyers either have to pay it off or roll it into the new loan, which can be a costly decision.

First of all, a lender may not even let a borrower trade in a car with negative equity unless they have money to cover it out of pocket. The alternative rolling the difference into the new loan raises the loan-to-value ratio, which can cause a loan to fall outside the allowed structure and lead to it being denied.

In cases where negative equity can be rolled over, consumers may want to think long and hard before doing so. This raises the loan balance, which leads to higher monthly payments and increased interest charges a costly move for borrowers with less than perfect credit who receive higher interest rates. Also, this instantly creates more negative equity in the new loan, so the same problem could arise in the future.

Will Trading In My Car Help My Credit Score

September 2, 2021

Oftentimes when people set out to purchase a new vehicle, they either dont know about or havent considered a trade-in. If your credit isnt where you want it to be but youre in the market for a new vehicle, you can actually rebuild your credit score by trading in your current vehicle. In simplest terms, when you trade-in your vehicle, the dealership determines its value and offers you a sum of money which you can put towards your next vehicle. If your car is already paid off its even better, but you can still trade in a financed vehicle. A trade-in is a great way to build up your credit score because you can make consistent payments, proving your reliability as a lender.

Read on to learn about the optimal credit situation for car buying, how to rebuild your credit score with a car loan and tips for building your credit and stabilizing your finances.

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Apply For Used Car Financing Online

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How To Trade In Your Car When You Owe Money On It

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Yes, you can trade in a car with a loan. But proceed with caution and make sure you not the dealer control the transaction.

If youre trading in a car you still owe money on, youre looking at one of these two situations:

  • You have positive equity. If your car is worth more than the amount you owe on your loan, youre in good shape. This difference is called positive equity and its like having money that you can apply toward the purchase of a new car.

  • You have negative equity. If your car is worth less than what you still owe, you have a negative equity car also known as being upside-down or underwater on your car loan. When trading in a car with negative equity, youll have to pay the difference between the loan balance and the trade-in value. You can pay it with cash, another loan or and this isn’t recommended rolling what you owe into a new car loan.

Well show you how to handle each of these situations. But first, a little background.

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Trading In Your Upside

If you have the flexibility to work remotely or you can rely on other forms of transportation, you might be able to do without your car. Perhaps you can share a vehicle with your spouse or significant other. Regardless, one way to offload an upside-down car is to trade it into a dealership.

Negative equity means youre in the hole so, if you trade in an upside-down car, youre on the hook for the negative amount of equity. In other words, youll still owe money to the dealer.

For example, lets assume your car loans outstanding balance is $20,000 but your car is only valued at $17,000. To trade in your car, youll have to pay the dealer the difference: $3,000. If you have the liquidity to afford it and you dont need a vehicle this can be a good option for getting out of debt.

Can You Trade In A Car With Poor Credit

So heres the thing about a trade-in: dealerships will take trades of all kinds, but they only pay a good price for vehicles they can resell. Anything that cant be reconditioned easily and resold quickly just isnt worth much to a dealership.

You CAN trade in a junk car, a car that doesnt run, or one thats not safe even a car thats been in an accident and hasnt been fixed. But youre just not going to get much for it. The dealer might give you one dollar for trade-in value or they might tell you they dont want it at all.

The other detail to keep in mind is that the trade value youre offered may not be an actual trade value. They could be showing you more money for your trade than youre actually getting, then jacking up the sale price for the car you want. There are gimmicks dealers can do on the back end, and you might not even realize youre getting hosed until its too late. You have to be careful.

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Is It Smart To Trade In A Car With Negative Equity

Financially, it can make sense to trade in a car with negative equity if the car is in poor condition and unreliable. You don’t want to put yourself in a position where your vehicle is costing you a lot of money in extensive repairs. Trading in a car with negative equity can be beneficial if you can find a vehicle that is less expensive and fits into your budget.

However, you need to be careful, as you could go into greater debt and more negative equity. If you can hold off on buying a new vehicle, you can reduce your negative equity by making extra payments on the car loan. Delaying a trade-in is often the best option financially, but it only works if you can hold off your trade-in until you’ve saved enough to pay off the loan.

Your negative equity must be paid off sooner or later. If you need a newer car sooner, you may consider paying off the negative equity all at once out of your own pocket. For example, if you currently owe $15,000 on your car and the dealer offers $12,000 for a trade-in, you can make up the $3,000 difference to your lender. Before you do this, check and make sure that there is no prepayment penalty.

What Are The Next Steps

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Rolling Your Existing Loan Into A Cheaper Car

When you trade your vehicle into a dealer and pay off the remaining balance, youre off the hook financially. But youre also left without a car. Although public transit and ridesharing are common alternatives, you might still want your own ride.

In that case, its not uncommon for people to trade in for a used car. You can roll your negative equity into a smaller loan with, ideally, a lower monthly payment. In turn, youll have more money to apply to your outstanding balance.

However, this approach is not a recommended solution because your new loan is immediately upside-down. You arent erasing the negative equity.

Keep in mind, by rolling your loan into a cheaper car, youre also extending your loans term. The longer your loan term, the more time your next car has to depreciate while you still owe money. If you dont proactively repay your new car loan ahead of schedule, you could dig yourself into a worse financial hole.

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When Should I Sell My Car Privately

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If youre considering selling your car privately, there are a few things to keep in mind. First, youll need to find a buyer whos willing to pay the price youre asking. This can take some time and effort on your part. You may also need to negotiate with buyers to get the best price.

Another thing to keep in mind is that youll be responsible for all the paperwork associated with the sale, such as transferring the title and registration. This can be a bit of a hassle, but its important to make sure everything is done correctly to avoid any problems down the road.

If youre thinking about selling your car privately, its usually best to do it when you dont need the money right away. That way, you can take your time finding the right buyer and getting the best possible price.

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Should I Find A Car First Before Applying For An Auto Loan

We recommend that you consult with one of our auto loan specialists first. They can determine how much you qualify for before you start shopping. This method will increase your chances of approval and decrease the number of inquiries on your credit report. Inquires may have a negative effect on your credit rating.

How Do I Get Out Of A Car Loan I Cant Afford

There are a few options available if you find yourself in a situation where you cant afford your car loan. Some include:

  • Refinancing your loan
  • Selling your car
  • Returning your car to the lender

If you are unable to make your payments, it is important to contact your lender as soon as possible to discuss your options. Additionally, you may want to consider speaking with a credit counseling or debt management service to help you get back on track financially.

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How Does Trading In A Car With A Lien Work

You can trade in a car that has a lien on it, but to do so you have to get the lien removed before you can legally pass ownership to the dealer. Usually, people will have a lien on the car as security for a debt they owe to someone else, like a bank, where you offer your car as collateral. To get the lien removed, you will have to pay off your debt to satisfy the lien-holder.

Why Do I Need A Down Payment

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When you have bad credit, traditional auto lenders may turn you down. Thankfully, there are lenders who work with bad credit borrowers known as subprime lenders. These lenders work with a dealerships special finance department.

However, they dont approve just anyone for a car loan, and they have requirements that you must meet in order to be considered for financing. One of these stipulations is putting money down, typically at least $1,000 or 10% of the vehicles selling price .

Subprime lenders require a down payment to see that youre committed to completing the loan. This can be one of the hardest stipulations for any borrower to meet. The good news, though, if youve got a car you want to trade-in, it can help cover this down payment requirement.

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How To Trade In A Car With Negative Equity And Bad Credit

When you have bad credit and need to trade in a car with negative equity, you basically have three courses of action available:

  • Cover the Negative Equity Yourself – The easiest way to eliminate it is to make up the difference between your trade-in’s appraised value and your loan balance out of pocket.
  • Hold Off on Your Car Purchase – You could also postpone financing another car until you have eliminated the negative equity or even paid off your current loan. A good way to do this more quickly is paying more than the minimum amount on your current loan each month.
  • Roll the Negative Equity into a New Loan – This may be possible in some situations, such as when the amount of negative equity is minimal, but there’s no guarantee the lender will allow you to do this.

Select The Right Financing Period

When rolling over your debt, it can be tempting to select a longer contract. This can give you lower monthly payments. You could end up paying more for your car overall with accumulated finance charges and a higher interest rate. A shorter contract with the same interest rate can increase the monthly payment while shortening the time it takes to pay off the car completely. Use a payment calculator to determine what payments could fit into your budget.

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Trading In A Car That’s Not Paid Off And Has Negative Equity

If you trade in a car worth less than what you owe on it , it will have something called “negative equity.” In other words, you’ll still owe money on the vehicle even after you sell it. Often, the negative equity may become part of your new car’s loan or part of the negotiation on the price of your new car. Otherwise, you’ll need to continue paying your old car’s loan until it’s paid in full.


If your loan balance is $12,000 and your vehicle’s depreciated value is only $10,000, the vehicle would have a negative equity amount of $2,000.

Keep in mind that your vehicle might be traded in for even less than its depreciated value, increasing the gap between what you owe and what your car sells for. If you apply for a loan when buying a new car, your owed amount might be added to your down payment or applied to your new loan’s overall amount.

If you’re concerned about your trade-in’s negative equity, speak with your dealer and/or lender. Verify your remaining loan balance and your options for trading in the car before you get a new one. Otherwise, you could find yourself on the hook for a larger amount than expected. You might also consider selling your car independently rather than trading it in since this may get you more for the vehicle. You can also compare your options for car trading and selling online.

Finding A Bad Credit Dealership

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While a trade-in can help you meet the down payment requirement, you also need to get in touch with a bad credit lender. These lenders are also called subprime lenders, and they arent available everywhere, but weve got the hookup.

Start your car shopping with us at The Car Connection. We have a nationwide network of dealers that work with subprime lenders, and we can look for a dealership near you once you complete our free auto loan request form. Dont drive all over town and look for a lender it’s 2020, so start online with us!

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