Can I Trade In a Car with Negative Equity and Bad Credit?

When deciding whether or not to trade in your car, there are a lot of factors to consider. Not only does the condition of your car matter, but so does the value. And that’s just for your current car. The car you hope to trade in for will differ depending on factors such as your current equity value and credit score.

So if you happen to have negative equity in your current car and a bad credit score to boot, your options may be limited. But not to worry, there are still ways to trade in a car with negative equity and bad credit.

What is Negative Equity?

Otherwise known as being upside down on your auto loan, negative equity is as bad as it sounds. When cars are purchased on a loan, the added interest along with the principal owed on the car will usually cost more than the car is actually worth.

Plus, once a financed car is driven off the lot of a dealership, it will lose a percentage of its value. This is due to the nature of car sales, where it is harder to sell a car at full value to another secondary party. Dealerships charge the highest possible price to cover overhead and get every last dollar from their customers.

If you recently bought a car with a loan, then you likely have negative equity. This just means that you owe more on the car loan than the car itself is worth. When trying to sell a car with negative equity, you will soon realize how it is almost impossible to sell your car for enough money to cover the principal and interest of your auto loan.

When trying to trade in a car with negative equity, it is trickier than trading in a car that is fully paid off. You will be expected to pay your lender the difference between your car’s value and the amount owed on your loan.

What is Bad Credit?

Everyone in the United States has a credit score, whether they have borrowed money on credit or not. Once you get your first credit card or take out a student loan, you will start to develop your own personal credit score. If you plan to buy a car on a loan, or if you even have an auto loan already, then this can effect your chances of trading in your car.

In the event you have a bad credit score, be it due to some late payments or carrying high balances, it will be trickier to take advantage of financing a new or used car. When it comes to trade ins, your bad credit score will impact your ability to get reasonable terms on your new car.

Trading in a Car with Negative Equity and Bad Credit

If you are ready to trade in your car, and you have both negative equity and bad credit, then you will have limited options. But let’s take a look at the steps you can take.

First, you will need to be able to afford the difference between your car’s value and the balance of your loan. If you have bad credit to boot, then you may not be able to further finance the new car you are trading in towards.

Your best and likely only option will be to continue driving your current car until you can afford to pay down your current car loan until you have positive equity. Once this happens, your credit score may increase enough to provide better financing terms.

Some dealerships will work with you to get you into a new car given your credit score, so explore your options and don’t settle. You should also consider how soon you can trade in a financed car. And don’t be in a rush to finance a new car – take it slow and allow yourself time to pay down your current loan.