Can I lower my car payments by trading for a less expensive car — trade down?
Yes — maybe.
But whether it’s a good thing to do will depend on your particular circumstances. Let’s take a look.
If you want to trade your car for a cheaper car, it probably means you are finding it difficult to afford payments on the car you now have. Or you simply want to trade down to have a little extra money each month by lowering your payments.
Let’s look at the two different possible situations, one of which will probably match your own situation.
You are “upside down” on your current loan. That is, you currently owe more on your loan than your car is worth as a trade-in vehicle. You can determine how upside down you are by first asking your bank or loan company to give you your loan payoff balance. Then compare that amount to the actual trade-in value of your car (see www.kbb.com and www.nadaguides.com). The difference in the two amounts will tell you how much you are behind in your loan (“negative equity”).
If you went to a dealer and found a cheaper car, the dealer would add your negative equity to the price of your newer car, which might make it not so cheap anymore. In fact, your cheaper car could easily result in higher monthly payments than before, which is not the result you wanted.
This technique will only lower your monthly payments if 1) you are not upside down by very much, and 2) the new loan company or bank will approve the larger loan, and 3) the price of your new car is significantly less than the old car.
It would also work if you could pay off the negative equity in cash as a down payment.
Otherwise you are better to simply find a way to keep making payments on your old car. If you pay down your loan such that you are no longer upside down, you will have more options, as described below.
You are NOT “upside down” on your current loan. This means your car is worth more than the amount you owe on your loan. This is a much better situation.
Let’s say that your car is worth $5000 as a trade-in and you only owe $3000 on your loan. When you trade for a new car, the extra $2000 will be subtracted from the price of your new vehicle, making your payments lower. Your trade equity acts as a down payment. By selecting a lower priced car, you can dramatically lower your monthly payments in this way.
However, you can do even better if you sell your car yourself, rather than trade it at a dealer. You can get much more money that way.
Sell the car, pay off your loan yourself, and use the leftover money as a larger down payment on your new car, or keep some of the money. Either way, you maximize the value of your old car, which helps minimize the cost of your new car.
Here’s the best situation
Your current car is paid off and you want to trade for a less expensive car.
If the trade-in value of your current car is more than the cost of the new car you want, a dealer will simply write you a check for the difference. You get a new car and money to spare. What a deal.
Where to find good used cars in your area
If you need to find a cheaper used car, one of the best web sites for good low-mileage cars is Car Deal Finder which lists thousands of used cars. You can easily see those for sale in your area and check prices. Dealers will trade for your current car.
Trading your car for a cheaper car only works if you are not upside down on your loan, or not significantly upside down. Otherwise, you may find that your cheaper car is actually more expensive since, in effect, you would be paying off two loans at once.
Furthermore, if you trade to get a cheaper car, you’ll still have to get a new loan, which means you must have a good credit score. Before you waste your time looking into trading for a cheaper car with a new loan, you should check your latest credit score. Get your Experian Credit Report FREE at freecreditreport.com.