Part I: Auto Loan Options for Bad Credit
Shopping for vehicles with bad credit can be like walking through a minefield. It is possible to get across safely and into the car of your dreams, but it will require careful thought and strategy if you want to avoid overpriced lemons, crooked loans and outright fraud.
In this guide, we explain how to find the best deal on an auto loan if you have bad credit. We dig into the pros and cons of financing through credit unions, banks, personal loans and dealers. Finally, we bring to light the biggest auto financing scams and show you how to avoid them.
We geared this guide toward young adults with a short credit history; immigrants who have not established credit; anyone with a history of late payments, credit collections and bankruptcy; and someone who has suffered from identity theft, divorce or other negative credit events.
How bad credit impacts your cost of borrowing
When you have poor credit, it will be harder for you to find affordable auto financing but not impossible. You should be prepared to face higher interest rates, for one thing, and you may be required to have a co-signer or put down a larger down payment in order to get approved.
Most people think of their credit score as a single number, but when it comes to auto lending, that’s not entirely true. Most auto lenders care a lot more about your history with auto loans than about any other part of your credit history.
A good credit score isn’t just about interest rates. Bad credit may mean that you’re ineligible for a loan at any interest rate. The single most important factor in getting approved for an auto loan is whether or not you’ve had a repossession in the last year. People with recent repossessions will struggle to find a reputable lender. During bankruptcy proceedings, you may struggle to find financing.
However, shortly after completing bankruptcy, you’re likely to get flooded with auto loan offers. Lenders know that you can’t file bankruptcy for another eight years, so they may consider you a better credit risk.
If you have bad credit, you might find a lender to approve your loan, but you’ll likely pay a high interest rate. Just how much does bad interest cost? A borrower with a credit score below 500 will expect to pay $9,404 for a $16,000, 61-month car loan, according to interest rate estimates from Experian. That’s 4.1 times the interest that a prime borrower can expect.
People with bad credit face dramatically higher interest rates than borrowers with good credit. According to the Experian State of the Automotive Finance Market, used car borrowers with credit scores between 601 and 660 had average interest rates of 9.88% compared with the 16.48% rate faced by borrowers with scores between 501 and 600.
With such high interest rates, it’s usually best to avoid taking out an auto loan until you have decent credit. However, if you finance a car with bad credit, try to follow these rules:
- Use a significant down payment. We recommend putting down at least 20 percent on any vehicle purchase. A larger down payment not only results in a smaller loan, but you’ll pay less in interest over time. Additionally, cars depreciate in value rapidly once you purchase them. By putting down 20 percent, you’re making sure you’re only financing what the car is actually worth.
- Do your research first. Consult the Kelley Blue Book to determine the vehicle’s value, and have the vehicle inspected by a trusted mechanic before you buy it.
- Avoid loan terms that are longer than four years. The average subprime borrower purchasing a used vehicle takes out a loan for over five years (61.6 months), according to Experian. Long loans may mean you’ll pay more in interest and possibly face costly repairs before you finish paying off the car.
- Borrow only what you can afford to pay back. A good rule of thumb to follow is that the total cost of your monthly car expenses shouldn’t be more than 10 percent of your gross monthly income
- Demand fair terms. If you have bad credit, you can’t expect a great interest rate on your loan, but you can expect fair terms. Don’t accept a loan with prepayment penalties or mandatory binding arbitration clauses.
These rules can help you protect yourself against predatory lenders and unaffordable loans.
Credit union auto loans for bad credit
The fastest growing issuers of auto loans are credit unions. According to Experian, at the start of 2015, credit unions held just $215 billion in open auto loans. Today they hold $286 billion.
Navy Federal Credit Union and USAA are two national credit unions that will work with people who have bad credit. Please note, neither credit union guarantees loan approval. However, they both offer courses to help you improve your credit, and they have car-buying programs to help you find a vehicle in your budget.
Navy Federal Credit Union
- Down payment required: None
- Loan terms: 12 to 96 months on new vehicles; up to 72 months for used vehicles
- Credit score requirements: No minimum score. More likely to be approved if you have a low debt-to-income ratio and few major derogatory marks (such as collections or repossessions).
- Full review
Navy Federal Credit Union is open to members of any branch of the U.S. military, civilian and contractor personnel, veterans and their family members. They do not have specific credit minimums for their loans, but they consider debt-to-income ratios and credit history.
Unlike most banks, NFCU will help you if you have negative equity in a vehicle. They lend up to 125 percent of the new vehicle’s value. Navy Federal Credit Union approves borrowers for both private party and dealership loans, and they have free online courses to help you make the best buying decisions.
- Auto loan APR: 7.74% and up for borrowers with poor credit
- Down payment required: Varies based on credit history and income
- Loan terms: 12 to 72 months for borrowers with poor credit
- Credit score requirements: Not available
USAA is open to members of any branch of the U.S. military and their family members. USAA determines loan eligibility based off of your credit history, your income, and your other debt obligations. You may not qualify for a loan if you have a credit score below the mid 500s, a recent repossession, or other derogatory marks.
USAA does not always require a down payment for a vehicle purchase, but they advise putting down at least 15 percent on vehicle purchases.
Banks and subprime auto financing companies
It’s getting much tougher for people with poor credit to borrow high-interest, high-risk subprime loans, as many of the largest banks in the U.S. have started to shy away from the product.
Ally Financial, the nation’s largest auto lender, limited their subprime lending to just 11.6 percent of their total lending in 2017. In 2015, the nation’s third largest auto lender, Wells Fargo, announced their intentions to limit subprime auto lending to less than 10 percent of their portfolio.
Of the five largest auto lenders in the U.S., only Capital One continues pursuing the subprime auto market. They lend nearly one-third (31%) of their portfolio to consumers with credit scores less than 620.
You can gain pre-approval before you start shopping for a vehicle. This is the best way to shop for an auto loan if you have bad credit. You do not want to pursue auto financing from the scam artists at a dealership.
Below, are auto financing companies and banks that will issue loans directly to people with poor credit.
- Loan size: $7,500 to $45,000
- Interest rate: 8% to 18%
- Loan terms: 24 to 69 months
- Down payment required: Minimum $250
- Credit score required: 500
- Vehicle requirements: 2009 or newer, mileage less than 125,000
SpringboardAuto.com is a direct-to-consumer, online auto lending platform. SpringboardAuto.com specializes in loans to people with imperfect credit histories. SpringboardAuto.com uses a soft credit inquiry to determine your loan eligibility. A soft inquiry allows you to shop for a vehicle loan without hurting your credit.
- Loan size: $5,000 to $75,000
- Interest rate: Up to 29.99%
- Loan terms: 12 to 72 months
- Down payment required: Dependent on multiple credit factors.
- Credit score requirement: There is not a minimum score required, however applicants are required to complete a credit application. Credit score is not the sole factor, but it plays a key role in determining approval and loan terms.
- Income requirement: $1,800 monthly minimum income
RoadLoans.com is a company owned by subprime auto lending giant Santander. Santander has suffered from more than its fair share of criticism in the subprime auto lending market. According to a March report by Moody’s Investors Service, the bank failed to verify incomes of 8 percent of borrowers whose loans it later bundled up into bonds and sold to investors. From a consumer’s perspective, it’s important that lenders verify your income before approving you for a loan because it’s never a good idea to borrow more money than you can reasonably afford to repay.
The scandals make this a reluctant recommendation, but the loans offered by RoadLoans.com are direct to consumer. That means you’ll see better rates and fair terms on the loans.
- Loan size: $7,500 to $40,000
- Interest rate: 3.24%+
- Loan terms: 36 to 72 months
- Vehicle requirements: Must work with one of 12,000 nationwide dealerships. Vehicle must be a 2005 model or newer with less than 120,000 miles.
- Down payment requirement: Must have a 10 percent down payment
- Income requirement: $1,800 per month
- Full review
Of the five largest bank lenders, only Capital One continues to expand their subprime auto lending operations. Capital One uses a soft credit pull to help you understand how much you may qualify for. Once you qualify for a loan, Capital One issues a “blank check,” which you can fill out at one of over 12,000 nationwide dealerships.
- Loan size: $2,500 to $100,000
- Interest rate: 1.99% to 22%
- Loan terms: 24 to 84 months
- Credit score requirements: 600 minimum score
- Income requirements: $2,000 month income
Autopay.com is an online lender that specializes in auto lending for people with fair credit. You need a credit score of at least 600 and an income of at least $2,000 a month to qualify for a loan on Autopay.com.
How to compare auto loan rates
Once you’re serious about car shopping, take some time to get the best auto financing. When you apply for an auto loan, you’ll usually see a “hard credit inquiry” on your credit report. This will drag your credit score down by a few points. To limit the damage of hard credit inquiries, do all your comparison shopping inside a 30-day window. Any auto loan applications that you submit within 30 days will count as just one hard credit inquiry on your score.
Get pre-approved for an auto loan
Once you know your numbers, you might think it’s time to start car shopping, but that isn’t quite right. It’s important to get pre-approved for an auto loan first.
Loan pre-approval allows you to walk into a car-buying situation knowing that you’re looking for price and quality, not financing. It frees you to focus on the final price of the vehicle and the value of your trade-in. Even more important, pre-approval can keep you from getting scammed by shady dealers.
If you’re planning to buy from a private-party seller, pre-approval is even more important. Most individuals won’t wait around for weeks or months for financing to come through. Without a pre-approval, you’re unlikely to get the deal.
Using personal loans for auto financing
If you’ve had a car repossessed in the last few years, you may struggle to qualify for any auto loans. But you may still qualify for a personal loan. This is one of the few situations where a personal loan makes sense to finance a car.
Personal loans also make sense if you expect to pay off the loan in less than a year. For example, you may want to take out a loan as a “bridge loan” while you work out the private party sale of a vehicle. If you’re underwater on a vehicle, you may need a personal loan to help you pay off your original loan upon the sale of your older vehicle.
Most people using personal loans will want to look for an unsecured personal loan. Unsecured means that you don’t have an asset to back up the value of the loan. Interest rates on unsecured personal loans tend be higher than those of auto loans. If you have bad credit, the interest rates can be as high as 36%, according to the MagnifyMoney comparison tool.
If you own an insured vehicle, you may consider a secured personal loan. These also have high interest rates, but those are somewhat tempered by the collateral. Of course, if you sell your vehicle or otherwise ruin it, you have to repair the vehicle or pay back the loan right away.
These are some of the best options for personal loans if you have bad credit:
- Amount: up to $35,000.
- Rates: 9.95% to 35.99%
- Loan terms: 24 to 60 months
- Upfront Fee: 4.75%
- Full review
Avant specializes in unsecured personal loans for people with OK to bad credit. The interest rates are high, but these are one option for people with bad credit. We recommend these loans if you’re borrowing a small amount or for a short time and you cannot qualify for better terms.
- Loan size: $1,500 to $25,000
- Interest rates: 17.59% to 35.99%
- Loan requirements: May require a vehicle as collateral or a co-signer (or both)
- Full review
OneMain Financial specializes in secured loans for people with bad credit. The loans carry super-high interest rates, but they may be the best rates available if you have bad credit. When you apply for a loan through OneMain Financial, you must complete the loan in a local bank branch.
- Amount: Up to $35,000
- Rates: 5.99% to 29.99%
- Term: up to 60 months
- Upfront fee: 0.99% to 5.99%
- Full review
Best Egg is one of our highest rated personal loans for avoiding fine print. If your credit score is at least 660, you could get approved. It is very difficult to get approved below 660.
The truth about dealer financing
Even with the best credit score, dealer financing is rarely a good deal. This is especially true if you buy a vehicle with an in-house loan office that claims, “No Credit, No Problem!”
Used car dealerships only work with a few auto lenders, so they can’t guarantee that you’ll get a great rate. On top of that, some auto financing companies let dealerships mark up the loan and keep the additional interest as a commission.
Even in the best-case scenarios, dealer financing can also get you focused on the wrong numbers. Salespeople will focus on the monthly payment amount rather than the price of the vehicle you’re buying and the value of your trade-in. To get the best possible deal, you want to know the price you’re paying for the vehicle.
Part II: Shopping for Auto Financing With Bad Credit
Essential Car-Buying Checklist
- Check your credit score
- Compare rates from several lenders and get pre-approved BEFORE going to the dealer
- Follow the 20/4/10 rule: Put at least 20% down; finance the car for 4 years or less; car payments should be less than 10% of your monthly budget.
- Check used cars for safety recalls (run the VIN at SaferCar.gov)
- Have a trusted mechanic inspect the vehicle
- Check Kelly Blue Book for price comparisons
- Negotiate the vehicle price
- Don’t waste your money on extended warranties
- Buy insurance on your own
- Complete the sale (at a local DMV if possible)
- Transfer the title right away
4 numbers to check before you buy a car
If you’ve struggled with credit in the past, or you’re a new borrower, then you need to know your numbers before you shop for a vehicle. Knowing these numbers will help you make a wise purchasing decision.
- Credit score
- You can check your credit score for free from a number of websites. The scores you see on the free websites won’t exactly match the scores auto lenders use. They will use FICO® Auto Scores 2, 4, 5, 8, 9, which can be purchased from myFICO.com for $59.85. Don’t like what you see? Don’t hire a shady “credit repair” company. Our ebook will explain how to repair your credit on your own, for free!
- Interest rates
- Many banks and credit unions use soft credit inquiries to help you estimate your auto loan interest rates. You can compare rates at Lendingtree.com to see what rates you might qualify for.
- Your budget
- We recommend following the 20/4/10 rule: Put at least 20 percent down, finance the car for less than four years, and have a payment of less than 10 percent of your income. You can use the Auto Affordability Calculator to help you determine a budget.
- Current car’s value
- If you’re driving a paid-off car, you have an asset that can go a long way in making your new car more affordable. Many dealerships will let you trade in your old vehicle as a down payment on a newer vehicle. Use Kelley Blue Book to negotiate a fair trade in value.
Dealer financing scams and how to avoid them
“No credit? Bad credit? No problem!”
When you shop for credit at a place that advertises, “No Credit? No Problem!” the financiers smell desperation. They may stick you with a bad loan, or they may outright break laws. These are just a few scams you might encounter from dealer financing operations. According to Consumers for Auto Reliability and Safety (CARS) Foundation president, Rosemary Shahan, “In general, buy-here pay-here financing is just overpriced junk. […] We always recommend that people avoid financing at the dealership. There are just too many games that they can play.”
Yo-yo financing is when dealers allow you to sign a contract at one rate, and then unilaterally change the terms of the contract a few weeks after you’ve taken home the vehicle. They usually claim that the “financing fell through” and you need to sign a new contract at a higher interest rate. This is an illegal practice, but it may require costly litigation to prove.
To protect yourself, keep copies of all loan documents you sign, and don’t drive away with a car until you’ve paid for it.
Mandatory binding arbitration clauses
Most dealer financing includes forced arbitration clauses. In this clause, customers waive the right to a jury trial and must settle disputes in private arbitration. Dealers can delay arbitration or fix outcomes by paying private companies.
Shahan claims, “When you go to arbitration, you’re almost always going to lose. The companies have them in their pockets.”
Some loan officers stuff contracts with overpriced extras with dubious value. For example, they may include service contracts, extended warranties and unclear fees. When you do the math on these products, they’re rarely worth the money.
If you plan to take out a loan for more than your car is worth, you may have to buy Guaranteed Auto Protection (GAP) Insurance. This insurance covers the difference between the amount of your loan and the value of your car. It helps you pay off your loan if your car gets totaled. Generally, you’ll want to buy this (and all other car insurance) on your own.
Your old vehicle is an asset, and you should get close to Kelley Blue Book value for it. Some shady dealers will value your vehicle at pennies on the dollar. Because of a low valuation, you may be stuck financing a larger amount. A private sale will always yield the biggest bang for your buck, but that might be inconvenient for you. Even so, you need to negotiate for a fair trade in value.
Focus on the monthly payments
Salespeople often focus on monthly payments rather than true affordability. Because of that, you may lose track of the price you’re actually paying for a vehicle. When buying a vehicle, getting a loan pre-approval will help you focus on the price rather than the monthly payment.
Selling mechanically unsound vehicles
Some used car dealers sell vehicles that don’t work to unsuspecting customers. Even worse, some dealerships sell unsafe vehicles that are branded as “certified pre-owned.” Used vehicles can be sold as certified pre-owned despite the fact that they have unrepaired safety recalls.
The Federal Trade Commission requires banks to check for unrecalled safety recalls, but buy-here pay-here lots don’t have to. Unless you check for safety recalls yourself, you might buy a vehicle that the manufacturer has called unsafe.
In general, once you’ve purchased the vehicle, you can’t return it, and you have to pay for repairs on your own. Before you buy a used vehicle, have a trusted mechanic inspect it. Additionally, check the VIN number at SaferCar.gov. This database will tell you if the car you want to buy has unrepaired safety recalls.
Some dealers fail to transfer a title within a timely manner. That opens you up to credit and legal risks. Car dealers should explain exactly when you should expect to see the title. Ideally, you can walk out of a dealership with an assigned title or certificate of transfer.
Know your rights
Car buyers do not have many ways to protect themselves from shady dealers or financiers, but if you know your rights, you can protect yourself from the most damaging problems.
- Title rights. Every state has different rules surrounding title transfers, but in every state you have the right to a title when you purchase a vehicle. You should know exactly when to expect the title before you pay for a vehicle. When you buy from a private party, you should expect to transfer the title immediately regardless of state laws.
- Insurance rights. A bank may legally require you to purchase vehicle insurance. However, you have the right to purchase the insurance on your own. Take advantage of this right; you’ll save a ton of money.
- Refuse financing. Despite high-pressure sales tactics, you don’t have to take out financing from a dealer. You can take out a loan from a bank or credit union instead.
- Contract rights. If you’ve signed a valid contract, a financing company cannot change the terms. They cannot force you to sign a new contract with less favorable terms.
Don’t work with dealers that don’t respect these rights. If you’re caught with a company that does not recognize your rights, complain to the Consumer Financial Protection Bureau right away. The CFPB helps customers connect directly with financial institutions and responds to issues within 15 days.
Since vehicle buyers don’t have many “inherent” consumer protection rights, you protect yourself.
Only work with private parties or dealers that allow you to do the following:
- Inspect used vehicles
- A trusted mechanic can help you evaluate the mechanical soundness of a vehicle. Most people cannot tell a lemon from a peach, and they need the help of a mechanic to determine the value of a vehicle.
- Run the VIN through SaferCar.gov
- Don’t buy a car that has an unrepaired safety recall. These vehicles are dangerous. If a vehicle has a scratched-out VIN, don’t buy it. It’s too big of a risk.
Avoid mandatory binding arbitration
- Don’t buy a car that has an unrepaired safety recall. These vehicles are dangerous. If a vehicle has a scratched-out VIN, don’t buy it. It’s too big of a risk.
- Avoid mandatory binding arbitration
- Most loans include a jury waiver clause or an arbitration clause. These clauses keep costs down for the bank, but the clauses are nonbinding. That means you have the right to appeal if you believe the bank or credit union committed fraud. Dealerships and dealer financing often require mandatory binding arbitration. That means you can’t appeal even if the dealer defrauded you with an unsound vehicle or an unclear title or other problems.
- Pay before you drive away
- A salesperson should not push you to take home a vehicle before you’ve paid for it. When they do that, they are almost certainly going to stick you with a higher vehicle price, or worse financing terms. Pay for your car first, then drive it away
Understanding your auto loan contract
- Mandatory binding arbitration – This means you cannot sue your financing company. Instead, all disputes are resolved through a private arbitration company paid for by the dealer. DO NOT work with companies that require mandatory binding arbitration.
- APR – This is the effective interest rate that you’ll pay on your loan.
- Dealer preparation fees – Unless a dealer has provided custom preparations for you, this is a bogus fee designed for the dealer to make extra money.
- Origination fee – This is the fee that the bank charges to originate the loan. It’s usually baked into the cost of the loan.
- GAP insurance – Guaranteed Auto Protection Insurance covers the difference between the value of your vehicle and the value of your loan. You may be required to purchase this if you have negative equity. However, you can buy this insurance on your own.
- Extended warranties – An extended warranty means that the manufacturer will cover the cost of repairs for a limited time. Most of the time, the warranties cost far more than the repair costs down the road.
- Loan term – This is the length of time required for you to pay your loan. We recommend keeping loan terms to less than four years.
- Loan-to-value (LTV) – The LTV expresses the value of your loan relative to the value of your vehicle. We recommend a starting LTV of 80 percent or less. If you have an LTV greater than 100 percent, then you rolled negative equity into the loan.
- Negative equity – When your vehicle is underwater (you owe more than the vehicle is worth), you have negative equity. It’s possible to buy a new car with negative equity, but we advise against it.
- Trade-in value – A vehicle trade-in can help you go a long way toward having a 20 percent down payment for your vehicle. During a trade-in, a dealer pays you for your old vehicle. You can almost always get more money by selling your vehicle in the private market, but it’s not very convenient. A dealer will make a trade-in offer that you can either accept or reject. Use Kelley Blue Book to determine whether you’ve received a fair trade-in value for your old vehicle.
Getting a co-signer for an auto loan
People with bad credit stand to gain a lot from having a co-signer on their auto loan. You can expect to qualify for a larger loan with lower interest payments, but asking someone to co-sign an auto loan is no small request.
A co-signer agrees to make your car loan payments if you are unwilling or unable to fulfill your loan obligations. If you skip a loan payment, you ruin your co-signer’s credit. For that reason, we generally discourage most people from becoming a co-signer. However, spouses who share finances may find that co-signing the loan is helpful for the family finances.
A co-signer can help you qualify for lower interest auto loans by providing one of three attributes:
- Their income may help you meet the minimum requirements for an auto loan.
- Their credit history is better than yours.
- They have a lower debt-to-income ratio than you.
If you’re a freelancer or small business owner, a co-signer may also offer the required income stability that puts you into a lower risk category.
When you ask someone to co-sign a loan, remember that they are putting their credit on the line for you. If you don’t think that you can make your loan payments, then you’re putting them at risk. Be careful about the request
How to refinance from a bad credit auto loan
If you’ve taken out a high-interest auto loan, you should be on the lookout for refinancing opportunities. Most people who make on-time auto loan payments and reduce their credit card debt will find their credit score increase over time. If you’re starting with a very bad credit score, you can see over a 100-point improvement within 12 to 18 months of good credit behavior.
Once your credit score is in the mid 600s, take a serious look at refinancing opportunities. People with credit scores between 601 and 660 paid an average of 9.88 percent on used auto loans, a full 6.6 percent lower than the rates paid by people with subprime credit.
Refinancing an auto loan is easy compared to shopping for initial car financing. That’s because the shopping process includes known variables. You know the value of your vehicle and the amount of financing you’ll need. You also know the interest rate you need to beat. If your current vehicle is underwater (you owe more than your car is worth), you may need to bring cash to the table to complete a refinance.
We recommend shopping for loan refinances through our parent company, LendingTree. LendingTree compares dozens of auto refinance offers all at once and shows you the best rates in the market. You can also compare offers to those you might find through myAutoloan.com or SpringboardAuto.com.
Part IV: Car shopping FAQ
Before you declare bankruptcy, you can buy a vehicle up to the motor vehicle exemption amount in your state. Unless the vehicle is expensive, you’ll probably get to keep the car during bankruptcy proceedings. However, your auto loan won’t be discharged in bankruptcy. You need to pay the auto note as required. If you include an auto loan in bankruptcy proceedings, you won’t be allowed to keep the vehicle.
Most people struggle to find auto financing after they’ve declared bankruptcy but before the bankruptcy is discharged. Courts even frown upon buying a car with cash during bankruptcy.
Once your bankruptcy is discharged, you can expect subprime lenders to flood your mailbox with auto loan offers. This is because lenders know you can’t declare bankruptcy for another eight years. However, it’s not necessarily a great time to finance a vehicle. Waiting a year or two for your credit to repair will allow you to finance a vehicle at a much lower interest rate.
If you don’t get approved for an auto loan, ask the bank why they didn’t approve you. Do you have insufficient income? Do you have a recent auto repossession on your credit report? Do you lack credit history? Perhaps your debt-to-income ratio is too high.
Once you know why you didn’t get the loan, you can work on fixing the problem. This guide can teach you how to improve your credit score for free. It’s also important to note that just because one bank didn’t approve your loan, doesn’t mean you can’t get a loan. Our parent company, LendingTree, helps consumers shop for multiple loans all at once. Using LendingTree or other loan aggregation sites can help you find a bank willing to lend to you.
Of course, you could resort to dealer financing, but we don’t recommend it, even as a last resort.
Some banks will not lend to you unless you have a co-signer (also known as a co-applicant). The co-signer agrees to pay for your loan if you stop making payments. If you have low income and bad credit, you’ll probably need a co-signer. However, most others can get around having a co-signer. If possible, we recommend avoiding loans that require a co-signer.
If you currently own a car, you can opt to trade in your vehicle at a dealership. When you trade in your vehicle, the dealership offers credit against the purchase of a newer vehicle. Many people use trade-ins in lieu of down payments.
Dealerships offer less money for a trade-in than you would get in the open market. However, private sales can be complex, and they often take a long time. Because of that, trade-ins can be a win-win for dealers and buyers. The key to a winning trade-in is not getting ripped off. Use Kelley Blue Book to determine your vehicle’s value, and use the KBB value to negotiate a fair trade-in price.
If you owe more than your car is worth, you need to be extra cautious about a trade-in option. When you trade in a vehicle with negative equity, you’re automatically starting your new loan underwater. To stop the cycle of negative equity, you need to find a vehicle that you can pay off in less than four years.
Most people cannot tell the difference between a high-quality and a low-quality used vehicle. We recommend paying a trusted mechanic to inspect the vehicle before you buy it. If a seller won’t let a mechanic inspect the vehicle, you don’t want to buy from them.
You should also personally check the nationwide vehicle registry to be sure a vehicle does not have any unrepaired safety recalls. If the vehicle has unrepaired safety recalls, don’t buy it. It’s not safe to drive.