Down Payment VS Negative Equity

[l3uck]

I am looking to buy a new vehicle. I have about  $6-7K negative equity in my current vehicle. I will have about $10k for a downpayment. My question is whether I should take some of the $10k and pay off the entire negative equity in my current vehicle or put it all towards a downpayment. My FICO(s) are in the mid to high 500's, so I may need the full $10k to make a more attractive loan to lenders? Any suggestions?

[lajntx]

Its always best in that situation to use all the cash as a down payment as it sends a better goodwill gesture to the lender.

However, why not take that same 10K and payoff your car, do some repairs, use the leftover to open a secured CC -  if you dont have any already, and work on improving your scores for awhile?

[92235]

If it were me, I would try to figure out the least I would have to put down to get the best interest rate on the newer car and use that as the downpayment. Then look at the interest rates of both vehicles and put the remaining funds into the one with the higher interest rate.

[ccnewcc]

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@l3uck wrote:

I am looking to buy a new vehicle. I have about  $6-7K negative equity in my current vehicle. I will have about $10k for a downpayment. My question is whether I should take some of the $10k and pay off the entire negative equity in my current vehicle or put it all towards a downpayment. My FICO(s) are in the mid to high 500's, so I may need the full $10k to make a more attractive loan to lenders? Any suggestions?

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I know what I would do if I were in your shoes.  I would take the 10k and pay off my car note now.  Consider this:  10k sitting in the bank earning very little interest while making car payments with comparatively higher interest.

Then, if my current car could handle it, I would live 6 months (maybe more) without a car payment to rebuild my savings and to make a down payment on a newer car.  

[coterotie]

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@l3uck wrote:

I am looking to buy a new vehicle. I have about  $6-7K negative equity in my current vehicle. I will have about $10k for a downpayment. My question is whether I should take some of the $10k and pay off the entire negative equity in my current vehicle or put it all towards a downpayment. My FICO(s) are in the mid to high 500's, so I may need the full $10k to make a more attractive loan to lenders? Any suggestions?

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Have you tried to figure out when you will turn positive/neutral on your current vehicle?  Is the negative equity because you want to trade it in or is it true retail value? 

[SoulMaster]

I would use the $10K to pay off the old car, too.  Then save up more and go buy the new one from the dealer w/o trading in your old one.  Once you have the new one, sell the old car via AutoTrader/Ebay/Craigslist/Newspaper/Etc then use that $ to pay down your loan.

Generally speaking, you'll get 10-30% more for a vehicle selling it to a 3rd party vs trading it in.

The other thing I'd consider (because I personally hate auto loans) is whether or not you really need a new car, or if you just want one.  Remember, you don't want to be stuck in a negative-equity trap your whole life, and that when you buy a new-new car you throw about $10K out the window as soon as you drive it off the lot.

-SM