Having a bad credit score could mean lenders may turn you away for financing. But if you choose the right lender, it can mean getting your next car loan – if you meet their requirements. Here’s how a trade-in can help you get approved by a bad credit lender.
A Trade-In With Equity
If you have an equity trade-in, it can help cover part (or all) of the down payment requirement from a subprime lender. The first step is determining if your vehicle has equity.
Equity simply means that you owe less on the car than it's worth. If you own the vehicle, meaning you no longer are making payments, even better. This means its entire value can be considered equity that you can use. If you’re still making payments, no worries, because estimating your car’s equity position is rather easy now thanks to online valuation services.
You can visit Kelley Blue Book or NADAguides online to estimate your vehicle’s actual cash value (ACV) by entering in the make, model, year, current mileage, and condition of your car. After you get the estimate, compare that to what you owe on the loan.
Owing less than your vehicle’s ACV means you have equity. That difference can be applied to your next auto loan. Any amount that your trade-in doesn’t cover can be paid with cash.
Remember, the more money you have available to use as a down payment, the less you have to borrow. Borrowing less gives you a better chance at a car loan approval.
Why Do I Need a Down Payment?
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 dealership’s special finance department.
However, they don’t 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 vehicle’s selling price (sometimes whichever is less).
Subprime lenders require a down payment to see that you’re committed to completing the loan. This can be one of the hardest stipulations for any borrower to meet. The good news, though, if you’ve got a car you want to trade-in, it can help cover this down payment requirement.
What if My Vehicle Has Negative Equity?
If you owe more on the car than the ACV, this means you’re in a negative equity position. A trade-in with negative equity won’t help you with the down payment requirement of a subprime lender, unfortunately. However, a little time and patience (and possibly extra payments if you can manage it) can help you put your vehicle back into an equity position.
Keep in mind that the ACV of your car is actually determined by the dealer that you’re working with. The estimate that you receive from online services may differ from the offer from your dealership – but online valuation services can be a great starting point.
Looking for a Dealership?
The larger the down payment, the less you finance, and the lower your monthly auto loan payment. You also decrease the amount of interest charges you pay throughout the loan term with a down payment, saving you money in the long run.
Many borrowers in all credit situations use their current vehicle to help them get into their next car loan, and for bad credit borrowers, it can be really helpful when you’re seeking approval.
If you’re looking for a dealer that works with subprime lenders, we want to help with that. At The Car Connection, we’re connected with dealerships nationwide that have special finance departments for bad credit borrowers. To get started, simply complete our online auto loan request form, and we’ll get to work matching you to a dealer in your area.