Trading in a car on a bad credit auto loan can be a good thing unless you owe more on your trade in than it is currently worth.
When to trade
As anyone at Auto Net Financial will tell you, it’s important to know where you stand with your trade-in vehicle when you fill out our secure online bad credit auto loan application. You need to be aware of whether or not you have equity in your trade-in because it can make all the difference in the world.
By equity, we mean how much your car is worth compared to how much you owe on it.
If your current car is paid off, or if its appraised value is more than what you owe on it, you have “equity” in your vehicle. On the other hand, if you owe more on your current car than it appraises for, you have “negative equity” in it – a situation that is known as being “upside down” in your trade-in.
A number of variables are involved if you currently are “negative” in your trade. These variables include the amount of negative equity, the type of car you’re buying, how much profit the dealer has in the deal, how much cash you can come up with for a down payment, as well as how the lender wants the deal structured.
Does it make sense?
If you take a good look at the situation, it only makes sense to even consider rolling negative equity into a new car if you have no other alternative. What you are essentially doing is paying for two cars at the same time – your old car on top of your new car. This is compounded by the fact that the interest rates on bad credit car loans are high. So when you roll negative equity into a bad credit car loan, you’re paying a high interest rate on two cars, not just one.
You should only do this if the car you are currently driving is not reliable or the new car you will be buying gets better gas mileage or is cheaper to insure. In other words, the new car must offer something advantageous that will help offset what is sure to be an increase in your monthly car payment. It also helps if you have some cash to help offset the negative equity.
Will the lender do it?
That depends upon the situation. Most bad credit car loan lenders use either Kelley Blue Book or the NADA guide as a benchmark for valuing the car you are buying (as a rule, western banks use Kelley, while Midwest and eastern banks use NADA). Lenders will usually allow the dealer to sell the car for 15% over the trade in price, although many subprime lenders have reduced this amount to 10% in the past year, due to the economy.
And although most bad credit lenders will not book your trade-in vehicle, they will usually insist that it be paid off in order for you to qualify for a new loan.
What about the dealer?
Again, it depends on a number of things. If the difference between the dealer’s selling price and 10%-15% over the trade value covers the negative equity (with room for profit), the dealer may very well do the deal. If there isn’t that kind of profit margin, you can either come up with a larger down payment or look for a different vehicle that might fit the lender’s parameters. In some cases, the dealer can call the lender to try and raise the 15% cap, but this can be very difficult in today’s lending environment.
As we see it
It is never a good idea to roll negative equity into another car. Because of the high interest rates of a bad credit car loan, this practice can be especially painful. By putting cash down in addition to your trade in, you can cut down on the amount of negative equity and make it easier for both you and the dealer to come to terms.
For more information about bad credit car loans, go to www.autonetfinancial.com. There you can begin the process of rebuilding your credit by filling out our secure online auto loan application. If you need additional assistance, go to the “About Auto Net” tab and click on the “Contact Us” line where you will find our toll free number. Our customer service representatives are available to answer your questions during normal business hours.
