When you need to trade in your car before your loan term is over, it's possible. But if you have bad credit, it's a good idea to wait until there's equity in your vehicle before heading to the special finance dealership to swap your ride for something different. If you don't, you may end up spending more than you want on your next auto loan.
Finding Out Your Car's Equity Position
To find out whether or not there's equity in your car, you need to first find out its estimated actual cash value (ACV). Next, you need to get a 10-day payoff estimate from your lender, which is the total owed on your loan plus 10 days of interest charges.
If your vehicle is worth more than you owe on the loan, you're in an equity position and can use that equity as all or part of a down payment on your next loan. If you still owe more than your car is worth, though, you won't be able to cover your existing loan with the vehicle value, and have to make up the deficiency balance out of pocket. This is called having negative equity.
To find out how much your car may be worth, visit an online valuation site such as Kelley Blue Book or NADAguides. These sites allow you to enter information about your vehicle and give you estimated values for resale and trade-in. These values can differ, and the true ACV of any car is the amount of money a dealer is willing to hand you for it. Consider these online valuations a guide, not a perfect representation of your vehicle’s value.
Since different dealerships may be willing to offer you different amounts for your car, we recommend calling around to compare prices so you can find the deal that's most worth your time and effort. It's a good idea to visit at least three dealers for a vehicle appraisal, making sure at least one is a franchise dealership for your car’s brand.
Trading In a Vehicle With Equity
When there's equity in your vehicle, you can use it to help you bring down the cost of your next car. If you have enough money left over from the sale of your vehicle, either privately or at a dealer, you may not need to save for a down payment.
If you're a bad credit borrower, subprime lenders typically require at least $1,000 or 10% of the car's selling price as a down payment, sometimes whichever is less.
Down payments don't have to be just in cash, though. The equity in your current vehicle can cover it, or you can combine your trade-in equity with cash to meet or exceed your lender’s down payment requirement. Remember, the more money you can put down on a car up front, the more you're able to save in the long run in interest charges.
Trading In a Car With Negative Equity
If your vehicle doesn't have the equity to cover your existing auto loan, you have to cover the rest of the cost out of pocket before your lender can release the lien on your car. If you're unable to do this, some special finance lenders may allow you to roll over your negative equity into another loan.
This can seem like a stroke of luck, but you're actually still the one paying off your original loan amount. When a lender rolls your negative equity forward, it gets added to your new loan. This can leave you in a tough spot if you're already dealing with poor credit.
Once the deficiency balance is added to your new loan, you're automatically beginning in a negative equity position with a bigger loan balance. Since bad credit borrowers usually qualify for higher than average interest rates, you're now paying even more for the vehicle once you factor in all the additional interest charges you're paying.
So, while it's possible to rollover your negative equity and get into the car you need, it may not be a wise idea. Doing this could leave you with too big a gap to bridge between your loan balance and your vehicle’s value when it comes time to trade in again. This may mean rolling over another loan, putting you squarely in the middle of a negative equity cycle that can be hard to break.
Getting Out of Negative Equity
In order to keep your car out of negative equity, and get the most out of your trade-in at a special finance dealership, there are a few tips you can follow:
- Make the biggest down payment you can. The more you put down, the less you have to finance on a vehicle. A smaller loan allows you to bring the balance under your car’s value more quickly.
- Opt for an affordable vehicle. The newer the car, the more impact depreciation typically has right from the get go. New vehicles lose around 11% of their value on average as soon as you drive off the lot. The loss of value over time doesn't take the same toll on all cars, and a used vehicle that has already seen a steep drop in value may be easier to keep in an equity position.
- Choose a car that holds its value. Just as newer vehicles lose more value up front, some manufacturers are known for models that retain more value over time. You can battle depreciation by opting for a car with good resale value, such as Subaru, Toyota, and Honda vehicles.
- Get the shortest loan term you can comfortably afford. If you balance your loan term and your monthly payment amount, paying the most you can for the shortest time, you should have no problem getting your car into an equity position, as long as you make all your payments on time. Remember, interest charges can rack up quickly, and the more you owe for longer, the more interest charges accrue. If you want to save even more money and get into an equity position faster, try these tips for saving money on your auto loan.
Ready to Find a Special Finance Dealership?
Now that you know what it takes to trade in your vehicle with a special finance dealer, it's time to find one in your area. Rather than searching in vain, start right here at The Car Connection.
We have a coast-to-coast network of special finance dealerships that are signed up with the subprime lenders you need to get you approved even with bad credit, no credit, or bankruptcy on your credit reports. To find a dealer near you just fill out our free car loan request form and we'll get right to work for you!