Does Trading In A Car Hurt Your Credit?
Often, when people set out to purchase a new vehicle, they either don’t know about or haven’t considered a trade-in. If your credit isn’t where you want it to be but you’re in the market for a new vehicle, you can actually rebuild your credit score by trading in your current vehicle. In simplest terms, when you trade in your car, the dealership determines its trade-in value and offers you a sum of money which you can put toward your next vehicle. If your car is already paid off it’s even better, but you can still trade in a financed vehicle. A trade-in is a great way to build up your credit score because you can make consistent payments, proving your reliability as a lender.
Read on to learn about the optimal credit situation for car buying, how to rebuild your credit score with a car loan, and tips for building your credit and stabilizing your finances.
KEY TAKEAWAYS
- Trade-ins with a loan are common at most dealerships in Canada.
- Negative equity can make trade-ins a little more complicated.
- Consistent loan payments can show reliability and help rebuild credit.
- There are many ways to improve your credit score—trading in is just one.
- The higher your credit score, the better your interest rates will be.
TRADING IN YOUR CAR WITH A LOAN
It’s very common for drivers to trade in their financed vehicles in Canada. Most dealerships, Birchwood Credit included, have no problem trading in a vehicle that isn’t paid off yet. But it’s important you understand how the trade-in process works before you consider it as an option for yourself.
The first thing to know is that your loan will not disappear once you trade in your vehicle—regardless of how much money you owe. Instead, the remaining amount of your loan will be transferred to your new vehicle.
CAN I TRADE IN A CAR I’M STILL PAYING OFF?
Yes, you can! When the amount you owe on the car is less than the trade-in value, the process is pretty straightforward. Say you still owe $5,000 on a car and a dealer offers you $6,000 for it as a trade-in. The dealer pays off the $5,000 loan for you, which releases the lien. Then, you transfer ownership of the car to the dealer.
When the amount you owe on the loan is more than the dealer is offering in trade-in value, things get a little more complicated. Lenders often refer to this as an “upside down” car loan, which means you have negative equity in the vehicle you are trading in and that you owe more than it’s worth.
This sometimes happens when people buy a new vehicle without a down payment. In the case of negative equity, what usually happens is your old loan becomes part of your new loan. This is called “rolling over” and ultimately means you’re still paying for a vehicle you no longer own. Say you owe $10,000 on the old loan and the dealer offers $6,000 in trade-in. The dealer takes the remaining $4,000 and “rolls it over” into the new loan.
THE IMPACT TRADING IN A CAR HAS ON YOUR CREDIT SCORE
You can actually rebuild your credit score by trading in your current vehicle. In simplest terms, when you trade in your vehicle, the dealership determines its value and offers you a sum of money which you can put toward your next vehicle. If your car is already paid off it’s even better, but you can still trade in a financed vehicle. A trade-in is a great way to build up your credit score because you can make consistent payments, proving your reliability as a lender.
What is a good credit score to buy a car in Canada?
While there isn’t a golden rule for the best credit score you need to buy a car, it’s good to know how your credit will affect your car loan.
Generally speaking, the higher your credit score, the lower (better) your interest rate. Conversely, the lower your credit score, the higher (less optimal) your interest rate. Interest is the fee you pay for taking on a car loan so ideally the less you need to pay, the better. That being said, it’s not impossible to get a car loan, even if you have less than perfect credit (under ~660). At Birchwood Credit, we’ll help you find an affordable vehicle that fits your budget and needs so you can continue making consistent payments, in turn rebuilding your credit as you pay off your loan.
If you’re planning on trading in your current vehicle, you can also read our tips on how to maximize your trade-in!
Rebuilding a credit score with a car loan: does financing a car build credit?
In short, YES – you can rebuild your credit score with a car loan (and even by trading in your current vehicle).
If your credit isn’t where you want it to be, it’s possible to slowly improve your credit with a loan. But how? You have to use credit to build credit, so even if your score is low, you’ll need to be using credit actively in order to bump that score up. 30 per cent of your credit score is based on how much credit you’re using and a car loan is a great way to take on this challenge.
While an auto loan may seem like a lot up front, places like Birchwood Credit can work out a payment plan that actually fits your budget so you can make consistent, smaller payments to pay down your debt. This will help your credit score rebound much faster than other loan types. 35 per cent of your credit score is based off of your payment history so it definitely matters. Making consistent payments shows lenders you’re a trustworthy borrower and in turn, increases your credit score.
If you have a vehicle to trade in, the value of that vehicle will be put towards your new vehicle loan and could save you some money in the long run. This would help you pay off your loan and ideally increase your credit faster.
REBUILDING A CREDIT SCORE WITH A CAR LOAN: DOES FINANCING A CAR BUILD CREDIT?
In short, YES—you can rebuild your credit score with a car loan (and even by trading in your current vehicle).
If your credit isn’t where you want it to be, it’s possible to improve your credit with a loan slowly. But how? You have to use credit to build credit, so even if your score is low, you’ll need to be using credit actively in order to bump that score up. 30 percent of your credit score is based on how much credit you’re using and a car loan is a great way to take on this challenge.
While an auto loan may seem like a lot up front, places like Birchwood Credit can work out a payment plan that actually fits your budget so you can make consistent, smaller payments to pay down your debt. This will help your credit score rebound much faster than other loan types. 35 percent of your credit score is based on your payment history, so it definitely matters. Making consistent payments shows lenders you’re a trustworthy borrower and in turn, increases your credit score.
If you have a vehicle to trade in, the value of that vehicle will be put toward your new loan and could save you some money in the long run. This would help you pay off your loan and ideally increase your credit faster.
Tips for rebuilding your credit score
Wanting to improve your credit score? Trading in your vehicle is just one option. Here are some other ways you can rebuild your credit and gain financial freedom.
- Save up for a down payment. The more money you can pay up front, the less payments you’ll have to make later. Plus the smaller the loan a lender has to give, the less risk they take on (and the better they feel).
- Make payments on time, every time. Consistency is key when it comes to credit. Lenders want to see you are responsible and making payments on time, every time. This will increase your credit score faster and help you develop a good habit you can apply to other loans.
- Keep your credit card balance well below the limit. If you can keep your balance below the halfway point, the faster you can rebuild your credit. This shows the lender that you’re not maxing out your card every month, building their trust by showing you aren’t a risky borrower.
- Don’t spend beyond your means. Like we said above, you have to use credit to build credit – but use your discretion. It’s better to have a few active loans that you can realistically manage than to have a bunch you cannot.
- Limit your number of credit checks. Everyone applies for credit now and again and when they do, the lender will get their report from a credit bureau. Too many credit checks can actually lower your credit so in keeping with the tip above, try to be choosy about the credit you take on.
- Check your credit report and know your credit score. The first step to financial independence is knowing where your credit stands, so checking your credit report regularly is essential if you’re concerned about your credit. You can check your credit securely and for free with our Secure Credit Check or with a third-party app like Credit Karma.
LET’S START REBUILDING
Your credit score doesn’t have to prevent you from buying a car. Fill out our Car Loan Application to get the approval process started, whether you’re looking to buy outright or trade in your current vehicle.
Check out these other resources on rebuilding your credit score:
