Trading in your car can be an issue if you don’t have great credit. You need to be especially careful when trading in your car that still has an outstanding balance owed.
Why? Because auto dealers often “spot deliver” cars. That means the dealer gives you the keys to a new (or new used) car and lets you drive it home, but you haven’t been financed yet. If your financing application ends up rejected, the dealer likely won’t pay off the balance on your trade-in. So what should you do?
First, if you have an upcoming car payment due on your trade-in, pay it. This will protect your credit rating if the new car loan falls through and you have to pay off the old car. Just make sure you get credit for all the payments you make. Don’t let the dealer finance you on a larger balance than what you actually owe.
Second, know what your car is worth before you consider trading it in. Check out auto valuation reports and think twice before trading in a car that has “negative equity” (you owe more than it’s worth). The dealer will end up adding those payments to your monthly obligations on the new car. Check out https://www.consumer.ftc.gov/articles/0257-auto-trade-ins-and-negative-equity for more tips if you owe a significant balance on your trade-in.
Finally, keep your old car and don’t take the new car home. Until you receive financing confirmation on the new loan, don’t leave your trade-in at the dealership. Tell the dealer you want to wait until you have financing approval before taking delivery. To do this, make sure you visit dealership’s early in the day – don’t arrive in the evening when most banks and lenders are closed and you won’t have confirmation of financing until the next day or even beyond.
But most importantly, don’t be rushed or intimidated by a dealer trying to make a fast sale. You may be making payments for as long as 72 months and you should be sure you fully understand what you’re agreeing to. Take your time. Ask for copies of everything you sign. And don’t listen to a dealer who tells you trading in your car is the best option, especially if you still owe on the loan.
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