A Guide to Trading In A Car That Still Has a Loan On It
Trading in your car while still having an outstanding loan can feel a little complicated. So, can you trade in your car even if it’s still financed? Yes, but there are things to consider first.
Can You Trade in a Financed Car?
Trading in a financed car is quite common, but its process is not simple. When you trade in your car at a dealership, they’ll pay off your current loan, and any leftover value can be used toward your next car or added to your new loan. The key to making this process work smoothly is knowing exactly how much you owe and what your car is worth.
How Do I Trade in a Financed Car?
There are steps that you need to complete first before going to a dealer. Here’s how you can successfully trade in a financed car:
1. Find Out How Much You Owe
Start by reaching out to your lender to get the payoff amount for your loan. This amount includes your remaining balance plus any interest that’s built up. Keep in mind, that it could be a bit higher than what you see on your regular statements because of the added interest. Knowing this total will help you figure out if you have positive or negative equity in your car.
2. Determine Your Car’s Trade-In Value
Next, check your car’s current value. Websites like Kelley Blue Book and Edmunds can help you estimate how much your car is worth based on its make, model, mileage, and condition. This will give you an idea of whether you have positive or negative equity. After that, compare the estimated value to your loan balance to see where you stand.
3. Negotiate the Trade-In Offer
Dealerships often provide an initial trade-in offer based on their evaluation of your car. However, it’s important to know that trade-in values are negotiable. You can reach out to multiple dealerships to get a sense of what your car might be worth and use that information during negotiations.
When negotiating, keep the trade-in and new car purchase separate. Some dealerships might try to make up for a high trade-in offer by increasing the price of the new car. Be sure to focus on the total price of the car and the trade-in offer independently to get the best deal.
4. Finalize the Deal
After settling on the trade-in value, the dealership will pay off your remaining loan balance. If your car is worth more than you owe, the surplus will be applied to your new vehicle purchase. However, if your loan balance is higher than your car’s value, you’ll need to find a way to cover the difference (we’ll go over your options next).
What Happens If You Have Positive Equity?
If your car is worth more than what you owe, you have positive equity. This is a good spot to be in because it gives you an advantage when trading in your car.
How Positive Equity Benefits You
Let’s say your car is worth $7,000, but you owe $5,000 on your loan. In this case, you have $2,000 in positive equity. When you trade in the car, this $2,000 can be applied to your next car purchase, reducing the amount you need to finance your new vehicle. This can make the entire car-buying process more affordable, as you’ll need less money to borrow.
You can use the equity as part of your down payment, or the dealership might apply it directly toward the price of the new car. Either way, having positive equity makes the trade-in process more straightforward and reduces the financial burden of your new car purchase.
What Happens If You Have Negative Equity?
It becomes more complicated if you owe more on your car loan than your vehicle is worth, known as negative equity. This situation is more common than many people realize. IOptions When You Have Negative Equity
If you’re in a negative equity situation, you’ll have several options to consider when trading in your car:
Roll the Negative Equity Into a New Loan
One choice is to add the remaining balance of your loan to the loan for your new car. While this may seem easier at first, it’s not the best option. Adding negative equity means you’re borrowing more than the new car is worth, which can increase your debt and result in higher interest payments over time.
Pay the Difference
If you have the cash available, you can pay the difference between what you owe and your car’s trade-in value. For example, if your car is worth $9,000 but you owe $10,000, you’ll need to pay the $1,000 difference out of pocket. This option helps keep your new loan balance lower and maybe a better financial move than rolling the negative equity into your new loan.
Delay the Trade-In
If you’re not in a rush to get a new car, consider waiting until your current loan is paid off or until your car reaches positive equity. Cars lose value quickly, so it may take some time for your vehicle’s trade-in value to catch up to what you owe. Patience can help you avoid having to deal with negative equity when it’s time to trade in.
How Soon Can You Trade in a Financed Car?
Technically, you can trade in a financed car at any time, but timing plays an important role in your finances. New cars typically lose 20% or more of their value in the first year, so trading in a relatively new car could mean that you owe more than the car is worth almost immediately.
If you bought a new car recently, consider waiting at least a year before trading it in. This gives your car time to depreciate less sharply, and you may avoid negative equity or minimize its impact. If you’ve made a significant down payment or paid off a portion of the loan, you might be able to trade in sooner.
You Can Trade-In A Financed Car, But…
Trading in a financed car can be a great way to get a new vehicle, but it’s important to approach it carefully. Whether your car has positive or negative equity, knowing the value of your car, how much you still owe on your loan, and your options for dealing with negative equity is key. If you owe more than your car is worth, it might be worth considering other options, like refinancing or selling your car privately to avoid more financial stress. With the right preparation, you can make a smart decision and have a smoother experience when trading in your car.
