It’s not impossible but it is difficult trading in a car with bad credit and negative equity. In most cases it would require a down payment, which would vary based on the amount of negative equity.
What is Negative Equity
Negative equity is when you owe more money on a car than the car is worth. So, if you want to trade-in the car, you won’t get enough money to pay off the loan completely. This can happen if you borrowed too much money to buy the car or if the car loses value too quickly. It can be a big problem because you’ll still have to pay back the rest of the loan, even if you don’t have the car anymore.
It’s important to do your research and understand all of your options before deciding to trade in your car. Estimate the value of your trade using an online service such as Consumer Reports Trade Value Estimator. In most cases the dealership will give you the published rough trade value. Next contact your lender for the payoff amount. The difference between the two values is the amount of equity, or negative equity your used car holds.
Monthly Gross Income
Your monthly income plays a major role in determining how much negative equity you can roll into a car loan. The reason for this is simple: most subprime lenders approve loans only when the monthly payment falls below 12.5% of the borrower’s gross monthly income. The loan amount you qualify for increases as your income rises. Displayed in the table below are estimations of the highest possible car loan values, determined by monthly income, with a 13.42% interest rate and a loan duration of 72 months.
| Monthly Income | Maximum Payment | Maximum Car Loan |
| $2,000 | $250 | $11,823 |
| $3,000 | $375 | $18,473 |
| $4,000 | $500 | $24,631 |
| $5,000 | $625 | $30,788 |
| $6,000 | $750 | $36,946 |
In simple terms, to trade-in and purchase another vehicle with zero down the sum of your new loan plus your negative equity must fall below the maximum loan amount. To get a better idea what the maximum car loan would be for your scenario use our car affordability calculator; it takes into account month income as wells a negative equity.
Total Down Payment
The total amount of the down payment also plays an important role in determining how much negative equity you can roll into an upside down car loan. The math is pretty simple here. The sum of your new loan plus your negative equity must fall below the maximum loan amount plus your total down payment.
For that reason the amount of negative equity you can roll into a new loan increases as your down payment increases. A good way to increase your down payment is to focus on brand new cars that have a cash rebate. The amount of the rebate essentially wipes out the same amount of negative equity. View our updated list of the best cars for an upside down car loan.
Here are some options to consider:
Sell the car and pay off the loan: Chances are that you would get a little more for your used car if you sold it yourself and did not trade it in at the dealership. If you owe more on your car than it’s worth, you would still have to pay off the loan balance before. The downside to this is that after you sell your vehicle you risk being denied a new loan because of the bad credit. For that reason we recommend that you get pre-approved first. Online services like Auto Credit Express specialize in connecting people with bad credit and auto dealerships that have experience working with subprime lenders.
Refinance your current loan: If you have bad credit, refinancing your current loan may be difficult, but it’s worth considering. Refinancing could lower your monthly payments and make it easier to pay off your car loan, which could improve your chances of being approved for a new car loan.
The bottom line is that if your income is high, you have some cash on hand, and have bad credit it is likely that you can trade-in your car even if you have negative equity. On the other hand, if your income is low, you have little to no money for a down payment, and have bad credit it will be difficult to trade in a car with negative equity.
AutoByPayment.com offers accurate estimates of new car loan payments based on self-selected credit score, current rebates, down payment, and trade equity or negative equity, without customers having to provide their personal identifying information such as email and phone.