Trade in My Car or Put Down Cash on New Car?

By Tara Baukus MelloLifestyle and

Dear Driving for Dollars, 

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I want to trade in my car for a new one, but I still owe about $11,000. How do I figure out if I have to put down any cash as a down payment on the new one or if I can just use my trade-in as the down payment alone?

- Joann

Dear Joann,

The key to your question isn't just how much money you owe on your car but how much your current car is worth. For example, if your current car is worth $12,000 and you owe $11,000, you have $1,000 that you could use as a down payment toward a new vehicle. This is the equity you have in your car.

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Calculate your car's value, including its options, mileage and condition, on all of the independent vehicle pricing sites and print out copies of the prices. You should expect the dealer to offer you an amount that is similar to the trade-in values listed for your car. Use the pricing data you've gathered to negotiate for a higher amount if the dealer gives you a low offer.

Whether the equity you have in your car is enough for you to avoid putting cash down as well as trading in your car will vary based on the cost of the new car you are buying and your credit score. If you have terrific credit, you may be able to finance almost the entire new-car loan and still get a good interest rate. Even so, you may not want to because financing almost the entire sale price of the car or more is not the smartest financial move. Financing the full price, especially if you roll your taxes and other fees into the car loan, will mean you are immediately "upside-down" on your car loan where you owe more than the car is worth.

Try to put down at least 10 percent of the car's sale price, plus all the taxes and fees associated with the purchase, to avoid having an upside-down car loan. Putting down as much as you can will reduce your monthly payment and also will save you money on the interest on the car loan.

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