Can I trade my car if I have bad credit?
It’s like the answer to a lot of other questions, it depends.
It depends on how bad your credit is, what dealer you want to use, where you’ll look for financing, and the status of the existing loan on your trade vehicle.
Let’s take a look at how it might work.
I need a new car, and have a car to trade, but my credit is not good. How does it work?
In this case, it’s good that you have a vehicle to trade because it can be used as a down payment on a new vehicle loan — assuming you are not “upside down” and have some equity to use as trade credit.
However, your poor credit score might be a problem. Worst case is that you can’t be approved by a dealer’s bank or finance company. If a dealer can’t get your loan approved, he doesn’t get paid for his car, and there is no deal.
If the dealer has allowed you to take and drive the vehicle while he’s trying to get you financed, then you’ll have to return the vehicle.
A potential problem occurs when the dealer takes a long time — several days or weeks — to exhaust his financial sources before finding that he is unable to arrange financing for you. The problem is that even though you return the dealer’s vehicle, your trade vehicle may be gone — sold or traded to another dealer — and you can’t get it back.
In that case, the dealer is obligated to pay you for that vehicle, in the amount that he gave you credit for it as trade. Now, you have no car.
Another potential problem can occur if you had made a cash deposit or down payment to the dealer. If your deal falls through because the dealer can’t find financing for you, you should get your money back — assuming the dealer doesn’t charge you “rent” on the car you’ve been driving for several days or weeks. In that case, you may get part of your money back, but not all. Yes, it’s legal.
What’s the solution?
If you know you have bad credit, you should take extra caution when attempting to trade for a new car. If you don’t know your current credit score, you should. Get your Experian Credit Report FREE at freecreditreport.com.
A car dealer might give you the impression that he has approved your loan and let you drive your new car home. However, a dealer can’t approve loans. Only his bank or finance company can approve, and it might take a few days, if at all.
Therefore, when you have poor credit, it’s advisable to not take the new car home, and not hand over the title to the trade vehicle, until you are notified that your loan has been approved, regardless of how the dealer salesperson might advise you.
Can I get a co-signer and get approved
You could also consider getting someone to co-sign with you on your car loan — someone who has better credit and income. A co-signer is not usually a co-owner but simply someone who is willing to take over monthly payments if you fail to do so.
Having a co-signer brings its own set of potential problems. For example, if you have bad credit and don’t have a steady full-time job that produces sufficient income, even a co-signer will not help. You simply won’t qualify to be the primary on a loan and you won’t be able to buy the car in your own name. In fact, your name may not be anywhere on the car’s title or loan, meaning your “co-signer” is actually the buyer, owner, and loan holder.
Furthermore, anyone who agrees to be a co-signer, even a close family member, may not fully realize the risk they accept. First, the debt shows up on both the primary borrower’s and co-signer’s credit report, meaning it might limit the co-signer’s ability to get their own loans or home mortgage. Second, if the loan goes into repo status, both the primary and co-signer suffer damages to their credit and both are subject to collection miseries.