It's common for consumers to not have enough money in the bank to purchase a new or used car. Auto financing is available to purchasers who need it, depending on their credit histories. Many consumers have vehicles they choose to trade in when they purchase a different car. However, the trade-in does not always positively affect your loan approval.
When you find a vehicle you like at the dealership, your car salesperson will encourage you to submit a credit application to secure financing for your purchase. The dealership runs your credit and obtains a credit report, which it uses to create a contract for you. The dealership contacts other financial entities such as finance companies, credit unions and banks so it can sell your contract to them and obtain financing for you. You can negotiate several aspects of the loan, including the annual percentage rate and loan term length. Some consumers choose to go directly to their banks and credit unions to acquire financing for vehicle purchases.
Your loan approval is rarely based on whether or not you have a vehicle to trade in when you make a new purchase and apply for credit. Your credit history determines your creditworthiness. Lenders look closely at how much you owe on other open accounts and your past payment history. Any auto loans that you've paid off in the past also help you obtain credit for a new loan. You may be able to secure credit from your local bank based on a relationship you've built with the bank as a good customer.
When you choose to trade in a vehicle you own with a clear title, it functions as a down payment on your automobile purchase. The dealership will adjust the purchase price of your chosen car based on how much value it awards you for your trade-in. This works to reduce the amount of financing you need for your vehicle. Banks approve your financing requests based on what they believe you can afford. If your financing request exceeds this amount, your loan will be denied. Depending on how much financing you need, the trade-in could be enough to reduce your loan request so it is approved.
You are upside down in a car loan when you owe more on a vehicle than it's worth. Some vehicle owners purchase a car only to find out later that it depreciates significantly when they drive it off the lot. New cars may depreciate in value as much as 25 percent in the first three months. Some auto owners owe more on their cars two or three years into the loan than what their cars are worth. When a consumer rolls an old car loan into a new car loan with a new purchase, he will be making payments on a vehicle he doesn't even own. He automatically becomes upside down in his new car loan if he's approved. An upside-down trade-in can cause your loan to be denied because the amount being borrowed exceeds what the lender feels you can afford. Loan approval can be denied because the amount of the loan is more than the automobile is worth.
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