Can I Use My Trade-In on a Bad Credit Car Loan?

Get Car Financing
Even with poor credit.

By

Contributing Writer

David Topham is an Automotive Content Manager for Internet Brands. He works as the lead editor for CarsDirect and Auto Credit Express, and contributes to those sites alongside other Internet Brands' properties like The Car Connection. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - February 27, 2018

All lenders – even subprime lenders who work with consumers with bad credit – accept trade-ins as a down payment on a car loan. However, consumers need to be careful if they still owe on the loan and have negative equity.

Trade-ins as a Down Payment

For people who have a car and are going to take out an auto loan, trading in that old vehicle is a convenient solution. The dealership's staff will inspect the trade-in, run a background check, and determine the vehicle's actual cash value when making an offer. The trade-in's value, if the owner chooses to accept, can go toward the new purchase as a down payment.

For consumers with less than perfect credit, this is one way to meet a lender's down payment requirement. In most cases, poor credit lenders require a down payment of $1,000 or 10 percent of the car's selling price in cash, trade equity, or a combination of both.

What if I Still Owe on My Trade-in?

If a car buyer's trade-in is paid off, its entire value can be used toward the purchase. If they still owe on the vehicle, its equity determines how the situation moves forward.

Equity is the difference between what a vehicle is worth and the loan balance. When a car buyer trades in a car they have equity in but still owe on, the dealer will accept the trade, pay off the old lender, and apply the difference as a down payment on the new car. For example, if a car buyer still owes $5,000 on a vehicle worth $7,000, the $2,000 difference can go toward the down payment.

However, the trade-in process can become troublesome when a borrower owes more on the loan than their vehicle is worth – known as having negative equity.

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 (especially if they have poor credit) 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.

The Bottom Line

Car buyers, even if they have bad credit, can use their trade-in as all or part of a down payment if it's paid off or they have equity. If they have negative equity, we recommend they avoid trading in their vehicle unless they can cover the balance out of pocket. Financially speaking, it's smarter to wait until they've built equity or paid off the loan.

If you're facing less than perfect credit and need a car loan, CarsDirect can help you find financing whether or not you have a vehicle to trade in. We work with a nationwide network of special finance dealerships equipped to handle unique credit situations. Get started by submitting our secure auto loan request form today.

Free Credit Score

Get your free credit score now! Get a copy of your most recent credit score.

Get Your Free Score

Auto Insurance

Get competitive quotes on insurance in your area.

Sell Your Car

We will buy any car, running or not, with or (in most cases) without the title.

Get My Price

Need a Car Loan?

It only takes a minute.

, Contributing Writer

David Topham is an Automotive Content Manager for Internet Brands. He works as the lead editor for CarsDirect and Auto Credit Express, and contributes to those sites alongside other Internet Brands' properties like The Car Connection. He was born and raised in Michigan and is a graduate of Michigan State University.


Search New Cars by Loan Payment »

View estimated loan payments based on local rebates and financing offers.

Loan approval is not guaranteed and is subject to credit application and approval of the lender. Individual loan terms may vary. Use of this website constitutes acceptance of CarsDirect.com's Terms of Use, Disclaimer, Privacy Policy, and Cookie Policy.

Privacy Policy|Terms of Use|Cookie Policy|Disclaimer
COPYRIGHT 1999-2019 MH Sub I, LLC dba CarsDirect.com