Trade in Your Car with a Loan for Cheaper Car


For many drivers, financing a car makes vehicle ownership more affordable. As long as the monthly payments work for your budget, financing can be a good option.

However, that doesn’t mean monthly car payments are always cheap. If your monthly payment is too high, you may find yourself in a difficult situation.

If you can’t afford your car loan payment, you have a few options, such as trading in your current vehicle for a cheaper one.

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What happens if you can’t afford your car payment?

If you can’t afford to make your car payments, a few things can happen.

Maybe you missed a payment or two and received notice from your lender that you are delinquent. In this case, you may only be able to catch up with minor penalties.

However, if you’ve missed several payments, it’s usually a more serious matter. At this point, your lender may assume you’ve defaulted on the loan, meaning you’ve stopped making payments altogether.

When you have a car loan, the lender reports your missed payments to the credit bureaus. Because payment history is one of the factors that affect your credit score, missing multiple loan payments can cause your credit score to drop significantly.

If you can’t afford your car payments, and you default on the loan, your lender will repossess your vehicle. This allows them to sell the car and recover the money you owe.

Trade in your car for a cheaper one

If you’re having trouble making your car payments, it’s best to act before you run into delinquency or default on the loan. One of the most effective ways to get a cheaper car payment is to trade in your current vehicle for a cheaper one.

The process of trading in your vehicle is quite simple. Here are the steps you need to follow:

Request a trade in value

The first step is to visit a dealer and get a trade-in offer. The dealer will consider a few factors when calculating your offer, including:

  • The vehicle’s make and model
  • The vehicle’s mileage
  • How long have you owned the vehicle
  • The vehicle’s condition and whether it has any damage

Create a budget

Before you start shopping for new vehicles, it’s a good idea to set yourself a budget. Otherwise, you may end up in the same situation again. Determine how much you can reasonably afford to pay each month to determine a suitable price range based on your preferred loan term and estimated interest rate.

Buy new vehicles

Once you’ve received the trade-in offer and set your budget, you can start shopping for new vehicles. If you’re in the market for a cheaper car, be sure to factor in ownership costs beyond the sticker price of the vehicle.

For example, research the average cost of maintenance and repairs for cars you are interested in. You can also get a car insurance quote to see how much specific vehicles will cost to insure.

Use your trade-in credit to buy a new car

After finding a suitable car, you will be able to purchase the vehicle using the trade-in value as a credit towards the cost.

For example, if your trade-in credit is $6,000 and your new car costs $15,000, you’ll only have to pay $9,000 (plus taxes and fees). You can also talk to the dealer about obtaining another loan to finance the new car purchase.

Trade in a financed vehicle

If you want to trade in your financed vehicle for a cheaper one, it helps to have positive equity.

When you trade in a car in which you have equity, the dealer will pay the rest of the loan and deduct the equity from the price of the cheaper car. If the equity of your trade-in exceeds the price of the car you’re trading in, the dealer will cut you a check for the difference.

On the other hand, if you owe more than the car is worth, that means you have negative equity. Having negative equity makes it harder (and more expensive) to trade in your financed car for a cheaper one.

If you have negative equity in your vehicle, you can either pay the difference out of pocket, or ask the dealer to roll the difference into a new loan. However, if you have too much negative equity, taking out a loan may not be the best option. You’ll have a much higher monthly payment, which may defeat the purpose of trading in your current car.

Things to consider before buying a cheaper car

When you’re struggling to afford your car payments, trading in the current vehicle for a cheaper model may seem like a good idea. However, there are a few things you should consider before taking this option.

First, determine if you even need a car in the first place. If you can rely on public transportation, or borrow a friend or family member’s vehicle, not having a car may be the best option. You will not be responsible for any car related payments including maintenance, parking and insurance.

If you have to buy a car, make sure you choose a model that makes sense to you. For example, if you are on a tight budget, avoid buying a very old used car that may require you to spend money on regular repairs. You should also consider the cost of gas and insurance when buying a cheaper car.

Most importantly, always shop with your budget in mind. Choosing a cheaper car doesn’t have to be a permanent solution, but it can help you get your finances back on track.

Head shot by Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia,, Forbes and Bankrate.