Loans, Insurance & credit card information

Also called being “upside down”, having negative equity in your trade in is not a position most people want to be in. There has been an influx of customers with poor credit trying to buy vehicles lately. That is great for us because we help people with bad credit buy cars. The problem is how many people with bad credit want to trade in their current car (that they owe way too much money on), and lower their payment. Granted, most of these people are in SUVs and they want to also get a vehicle that will have better gas mileage, but I want to try to explain a little bit about how loans work, not just car loans, secured loans in general.

Rule Number 1 – If you are past due on your bills now, do not expect a decent interest rate.

The worst possible time to ask for a loan is when you cannot pay the credit cards and loans you already have. Think about it. If you are trying to lower your payment, and you have negative equity, make sure you have been current on all of the bills you already have for several months.

Rule Number 2 – If you have negative equity, and bad credit, your payment will probably not go down.

In fact, if you are not putting a lot of money down, your payment is probably going to go up. The reason is loan to value restrictions the lenders will make.

Rule Number 3 – Keep the loan to value in line.

I am going to give you a couple of examples of how people try to trade in a car with negative equity to try to help you understand how vehicle loans work. In both examples, the customer is trying to trade in a vehicle that is worth $10,000 and the customer owes $16,000. Total Negative Equity: $6,000.A.Car to be purchased has a value of $10,000 to the bank. The auto lender is willing to lend up to 120% of that value on this vehicle for a total of $12,000. The only way to do that would be to put $4000 down.B.The car to be purchased has a value of $25,000 to the bank. The auto lender is willing to lend up to 120% of that value on this vehicle for a total of $30,000. Since the customers are still $6000 upside down in their trade, they only need to put $1000 down in this situation.However, the payment on a $30,000 loan in Option B. is going to be a lot more than the payment of the $12,000 loan in Option A. Bottom Line: It might take some cash down to help you trade out of your vehicle. If you look at brand new vehicles, sometimes you can use factory rebates as down payment. The down side is most new cars that offer big rebates are expensive.

Rule Number 4 – The more negative equity you have, the higher your interest rate will be.

This makes sense if you think about it. If 2 people are buying the same $20,000 car, and one of them has a loan for $30000, and one has a loan for $10000, which one will have a lower auto loan interest rate? The one borrowing way less money, right? I hope you can recognize that it is less risk for the finance company to lend less money on a given car. Even if the loan turned into a repossession, they are probably going to get their money back when the car sells at auction.

Rule Number 5- When possible, don’t trade in with negative equity.

We find that people, on average, trade in their car every 2.5 years. Most people do not want to put any money down, and even more want the lowest possible payment. That is a recipe for disaster. Keep your car longer, put more money down, and you will not have the negative equity repeating cycle. It seems to get worse with every trade-in until dealers cannot help you trade in anymore.

Rule Number 6 – The lowest payment IS NOT the best deal.

Some auto loan lenders are willing to go up to 84-120 months for an auto loan. Doing this will guarantee being upside down in your loan unless you put a lot of money down. Be smart. If you cannot afford the 48 or 60 month payment, do you really need the car?