Will a dealer reimburse my trade-in loan?
When you trade in your vehicle, the dealership can send a check to the lender if you still have a loan on your trade-in. However, whether their offer is large enough to pay off your remaining balance is another thing. Here’s what you need to know.
Exchange of your vehicle
Exchanges are extremely frequent. Many borrowers – those who buy new and used cars – often trade in their old wheels to lower the sale price of their next trip. Out with the old and the new!
If you still have a loan on your vehicle, the dealership usually takes care of the paperwork and pays your lender themselves to release the lien so they can take ownership. Vehicles with a loan have a lien on the title, which prevents you from selling a car until the loan is paid off. In order to transfer ownership of a vehicle to someone else, this privilege must be removed for the transaction to be legitimate.
If you have a loan on your car, the trade-in process usually goes as follows:
- The dealership evaluates your trade-in.
- The dealer makes you an offer based on a valuation if they want to buy it.
- If you accept the offer, the dealer contacts and pays the lender who holds your title.
- Your lender issues a “lien release” letter so that you can transfer the property to the dealer if the amount is sufficient to pay off your loan.
- You sign the title to the dealership to close the sale.
Getting enough money to pay off your current lender is one of your biggest priorities. If you get enough to pay off your loan from the dealer’s offer, things get a lot easier and you might not have to pay anything out of pocket.
Sometimes your trade-in offer may not be enough to pay off your lender. In such situations, you can pay the remaining balance yourself. But what if you can’t afford the rest?
Will a dealership repay my loan no matter what?
The dealer is not required to repay the full balance of your loan. They just have to offer you what they think your trade-in is worth, also known as your car’s actual cash value (ACV).
However, many borrowers have vehicles with negative equity. Negative equity is when the value of your vehicle is less than what you owe on your auto loan. If you are in this situation, it can be difficult to get a deal large enough from a dealership to pay your lender.
However, some resellers may be able to work with you.
A dealership may be able to offer you the entire loan balance on your vehicle, even if the car has negative equity. Depending on your car’s negative equity level, you may be able to carry this amount toward your next car loan.
Let’s say your trade-in is worth $ 5,000, but you owe $ 9,000 on your car loan. The next car you want to buy costs $ 15,000. If your next lender allows it, you may be able to get $ 9,000 from the dealership to pay off your current car loan, and then carry that $ 4,000 of negative equity into your next loan. Your next car loan would be around $ 19,000 because you are now paying off the negative equity from the previous loan and the sale price of your next vehicle.
How much negative equity can I carry forward?
The amount of negative equity you can carry over to your next car loan depends a lot on the selling price of your next vehicle and the lender you are working with.
Auto lenders generally have limits on the amount of a loan they can make on a car. This is called a loan to value (LTV) ratio. Lenders compare the sale price of your next car to the loan amount you are applying for – if the loan amount you want is much more than the value of the vehicle, they may not approve you.
Ideally, you want to buy a vehicle with a 100% LTV ratio. This would mean that you are buying the car for exactly what it is worth. Lenders usually do not approve loans if the LTV ratio is above 125%.
That being said, if you have thousands of dollars in negative equity, you may not be able to carry it over to your next car loan. It may be better to just pay off your current car loan for a while, as negative equity resolves over time.
How exchanges are useful
Trade-in equity can be very helpful for borrowers with bad credit. If you get more than enough to pay off your current lender on a trade-in, that remaining money can be used to lower the sale price of your next vehicle. It’s also a form of down payment, which means your trade-in could help you meet a down payment requirement from a car lender.
When you have poor credit and apply for your next car loan, you are almost always expected to have a down payment. Most bad credit lenders, including subprime lenders, charge at least $ 1,000 or 10% of the vehicle’s selling price. If you don’t have the full amount in cash, your trade-in could help secure your next car loan.
Looking for a dealer?
You will probably find that almost all dealers are able to accept trade-ins. However, not all dealers can help borrowers with credit problems. Special financing dealers can, however, and we want to help you find one.
Finding a lender who can work with less than perfect credit can be easy if you work with us at Auto Express Credit. We’ll do our best to find a dealer who’s signed up with subprime lenders so you can focus on the rest. Fill out our free auto loan application form and we will search for a dealer in your area with no obligation.