When you have bad credit, it's challenging to buy a car. Trading in a car when buying a new model can help improve your odds of getting financed, as long as the car doesn't have a lien against it.
How to Work the Trade-In
Know the value of your trade-in vehicle before heading into a dealership showroom. Sites like Edmunds and Kelley Blue Book can give you a range of approximate values based on the year, mileage and wear-and-tear on your car. Negotiate the value of the trade-in before negotiating the new car price or allowing the dealership to pull your credit. This puts you in a better position to bargain.
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Know your credit score before you go into the dealership.
Hold off on an Upside Down Trade
If you have bad credit, you're going to have a difficult time trading in a vehicle that you still owe money on, especially if the loan is underwater or upside down, meaning you owe more than it's worth. The only way a lender might consider financing you is if you're concurrently making a down payment that negates the difference.
Put Cash Down
If you're able to put cash down, in addition to using your trade-in, you become a better credit risk. Not only does this approach increase your odds for getting financed, but you may be able to negotiate a better interest rate as well.
Shop around for loans before looking at cars and negotiating trade-in values. Go to your bank or credit union for a loan quote and ask the dealer to match or beat it.
Steer Clear of Bad Credit Lenders
Be wary of so-called, "bad credit lenders." They often charge excessive interest rates that result in getting you into debt and further damaging your credit. They may also tell you you have to buy life insurance or extended warranties to qualify for a loan, or that you need a co-signer. Read all contracts carefully to ensure you know what you're agreeing to. The lender should clearly spell out, in writing, the value of your trade-in as well as the price of the car, the interest rate and length of the note. Any promise to pay off an existing lien also should be in writing.
Look for extra or unexplained charges or terms that appear in the final paperwork and ask the lender to explain them and make corrections before you sign anything.
Even if you feel desperate for a car loan, don’t be afraid to walk away if the offer isn’t what you need.