If you are purchasing a vehicle with bad credit, a trade in can make or break your deal. It can be very beneficial or an extreme liability to have a trade in when buying your car. In this article we will explore both possibilities. When you have finished this article you will know if your trade in will help or hurt you when you are buying your next car.
If your trade in is paid off or if you owe a very small balance on it, you are probably in a very good position for buying your next car. Anytime you are trading in a vehicle you want to have positive equity. Positive equity means your car is worth more than is owed on it. This overage is the same as a cash down payment. If you have a car that you own free and clear and it is worth $1000, that is the same as having $1000 cash down. When buying a car with bad credit, some finance companies demand that you have a CASH down payment, however if the finance company wanted $1500 down, they will allow you to have $500 cash and $1000 from your trade. This helps to lower your monthly payments and lowers the risk on the finance company so it is easier to get approved. Finance companies say they don’t approve customers based on down payment, but it is hard for me to believe that. A finance company significantly lowers their risk if you have a large down payment.
Here is an example of a car deal with a special finance company. You are buying a car that costs $15000 including all taxes and fees. You are applying for a loan through one of these special finance companies. Let’s say the car is worth $13000. Usually the finance company will allow you to borrow the value of the vehicle plus the taxes and fees. In this case let’s say that equals $14500. In this case you would need a minimum of $500 down to cover the difference between the amount the finance company will lend ($14500) and the total of your purchase ($15000). If you have the $500 cash and also have a $1000 trade, now you only need to finance $13500. By lowering the total amount financed, you lower your payment and improve the chance that you will successfully make your payments, You also have shown a larger commitment to the finance company. Your trade in may actually be helping you get approved for a loan.
If you have a car that is still financed, you may be on the other side of the coin. If you are driving a car that is worth $3000 but you still owe $5000 on it you will have a more difficult time obtaining financing. Most finance companies will not finance negative equity (the difference between what you owe and what a car is worth). Now you will be required to come up with a cash down payment PLUS any negative equity. So if the finance company required $500 down and your car is worth $2000 less than what you owe, you now need a $2500 down payment. This scenario is often enough to keep you from being able to finance a new car. You might think “well I’ll just keep my other car and not trade it in”. This is also difficult. Most special finance companies will not allow you to have two open car loans.
You can see how your current vehicle can make or break your new car deal. Use this information to properly plan when buying your next car. Remember the more cash and trade you have, the easier it will be to buy a car.