Does a Trade-In Count as a Down Payment for a Car?
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Buying a new-to-you vehicle can be a lot of fun. Like a kid in a candy store, you shop a wide variety of cars with different features, colors, and options.
But with a car purchase also comes financial realities like the purchase price and monthly payments. If you're like most car buyers, you'll probably want to finance, which also carries interest charges. Making a down payment lowers the amount you borrow and lessens your car payments, so you have extra cash around for essential expenses.
But what if you want to trade in your current vehicle? Does trading in a car count as a down payment?
Let's look at the details of trading in and whether or not it counts as a down payment.
What is a trade-in car?
When you trade in your old vehicle, you receive money in return to put toward your next car.
Instead of the hassle of selling your vehicle privately, trading in is a matter of accepting an offer and using that sum to reduce the cost of your next one.
And instead of the weeks and even months it takes to sell your car privately, trading in is quick and easy, lasting as little as a few hours, so you can get behind the wheel of your new vehicle that same day.
Another advantage of trading in is that it can reduce your sales tax. In many states, you're only responsible for tax on the amount left when you subtract the trade-in from the purchase price. This can save you many thousands of dollars, so you have extra funds in your bank account for other essential expenses.
When it's time to sell your old vehicle, Shift makes it easy. All you'll have to do is enter the make, model, year, and mileage on Shift's easy-to-use website, and you'll instantly receive a purchase offer that's valid for seven days. You can get a fair offer, better than at the dealership, driven by powerful machine learning algorithms and tons of data. And with Shift, there's no need to spend extra time washing and waxing your car. A little dirt won't affect the quote since we fully detail the cars ourselves before putting them up for sale.
What is a down payment?
You make a down payment upfront to reduce the cost of buying a car. You can pay with cash or trade-in or by combining both.
Because a down payment lowers the total amount of money financed, it also lessens your monthly payments during the loan. And a significant down payment may affect the terms offered to you by a lender.
People have different monetary situations, and there isn't a one-size-fits-all amount for a down payment. Usually, the down payment is a percentage of a vehicle's purchase price. But it's your decision as the buyer to choose a value that fits your needs financially.
Choosing the down payment that's right for you comes down to a few variables: the term length of your loan, desired monthly payment, and your budget.
Whether a large or small down payment, whichever amount you decide on comes with its own benefits.
A larger down payment of 10 percent lowers the sum you borrow, subsequently lessening your car payments month to month. In addition, you'll pay less interest over the life of the loan.
When you make a significant down payment, you may secure better terms on your loan due to the lender seeing you as less of a risk.
In contrast, smaller down payments allow you to keep money in your bank account for essential obligations. If you want a vehicle a little more expensive than you'd planned, a lower down payment may make sense.
Buying a used car gives you the chance to save thousands of dollars versus buying a new one. These days, automakers build vehicles with such high quality that even used cars might look new. But when you decide to buy used, where can you go not only for a great price but also for a high-quality vehicle? Shift's certified mechanics perform extensive 150-point inspections on every car and have complete vehicle history reports, so you know your used car feels as good as new. And Shift has best-in-industry service contracts, so your vehicle stands the test of time.
Want to take a test drive before you buy? If you live in one of Shift's many service areas, a concierge will drive to you, letting you get a feel for the performance before signing the papers.
Does trading in a car count as a down payment?
Is a trade-in a down payment? Yes, you can use your trade-in as a down payment toward your next vehicle. However, several factors determine how your trade-in applies to your purchase.
If you have a financed car and want to trade it in, the value depends on how much equity you've built up.
Say you have about $10,000 left in payments on your current loan, yet your vehicle's only worth $8,000. This negative equity scenario is known as being "underwater on a loan." What happens when you trade in? A few options exist.
First, you can pay off the difference between the value of the car and the remaining sum on your loan.
Or you can roll over the negative equity into a new loan. However, if you decide on this route, remember it increases your finance amount.
If you don't mind waiting a while until you pay off your loan, that takes care of a negative equity situation. No matter the market value of your vehicle, once you own it, the entire trade-in amount can be used as a down payment.
If you have positive equity on your current vehicle or own it outright, you can use your trade-in as a down payment without any extra steps needed.
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Summing it up: Is a trade-in a down payment?
When you trade in a car, the amount you receive works as a down payment on your next vehicle.
However, depending on the equity you hold in your car, that sum might be its total trade-in value or none at all.
If you're upside down on your loan, you can take steps to use your trade-in as a down payment on your new-to-you vehicle.
If you have positive equity on your car or own it free and clear, the trade-in amount can be your down payment, with no additional steps required.
If you're like most used car buyers, you want to finance. But finding a good loan can be a hassle. Shift works with a network of trusted lenders who compete for your business, so you get the best deal on financing. When you apply for financing with Shift, there's no cost or obligation. And most applicants receive approval in minutes instead of days. Financing with Shift is so convenient that nine out of 10 customers choose us when they need a loan.
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All prices are based on vehicle availability and pricing as of
April 15, 2022
Pricing shown is not guaranteed and does not include taxes or other product fees.