Yes, equity in your current car can be used to help pay for a new car—see how it works.

When the average cost of a new car is $50,000 it’s fair to say buyers look for every possible way to bring down their out-of-pocket costs. Many folks wonder if they can use their trade-in as a down payment. The short answer is yes but there’s more you need to know.

A down payment isn’t always required

Some buyers finance a car without any money down. Usually, these are folks with stellar credit scores. However, no down payment means borrowing a larger amount unless you’re paying for the car all in cash and then you don’t need a loan.

When you have equity in a trade-in it can go toward a down payment

In order to use a trade-in as a down payment, you need to have equity in the car. This means the car is worth more than you owe on its loan. For example, if you have a car that’s worth $25,000 and your current loan balance is $10,000, you have equity of $15,000 that can be applied to a new car purchase. Using your equity as cash down on a new vehicle is a great way to reduce the amount of financing needed for a new car.

When the loan balance on your current car is higher than the car’s value, you have negative equity. This is also called being upside-down on the loan. Trading in a car that’s upside-down won’t reduce how much you borrow for a new car. If you roll the remaining balance on the current car into a new loan, your overall debt will increase.

Should you take the dealer’s trade-in offer?

Dealers simplify buying and trading-in cars, but that ease comes at price. Dealers will typically offer a trade-in value that’s lower than what you could get selling the car yourself. If your highest priority is getting the most money for your old car, sell to a private buyer. Here are tips to help guide you. If your priority is a hassle-free way of getting rid of your current car, negotiate the best trade-in value you can with the dealer.

When you’re ready to buy, check out auto loans at Consumers

Every year we help members get a new set of wheels (new and used) with some of the best auto loan rates and payment options around. Check out how easy it is to get pre-approved online so you know what you can afford before you start car shopping.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.