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It is possible to trade in an unpaid car. But it can be expensive to do so if you owe more than your car is worth.
Two scenarios apply if you’re trading in a car that you still owe money on:
What actions to take to trade in your car and what considerations to make will depend on your equity situation.
When you’re looking to get a new set of wheels, you may be anxious to get rid of your old car — even if you still owe money on it.
However, if you have negative equity—that is, if you owe more on your loan than the value of your car—trading in a car with a loan could be costly for you. Whether you have positive or negative equity, let’s examine your options and discuss how to trade in a car with a loan balance.
Can I trade in my car if it’s not paid off?
Generally speaking, even if you’re still making payments on your car, you can trade it in for a new one. However, first understanding your equity in the car is helpful. That is the discrepancy between the current value of your car and the loan balance. Based on those two variables, your equity is either positive or negative.
You have positive equity if the value of your car exceeds the amount you owe. As the name implies, positive equity is a good thing. The dealer may use any equity you have when you trade in your car to help you pay for the new one. This reduces the amount you need to finance.
You have negative equity if you owe more on your loan than the value of your car, and you’re not alone.
According to Edmunds data, when new car sales with vehicle trade-ins were examined in April 2020, 2044% of the trade-ins had negative equity, with an average of $5,571% remaining on the loan. You must choose the best course of action if you wish to trade in your car but it has negative equity.
- Roll the negative equity into your new car loan. Although this option might be more convenient, it raises the amount of your new loan, which could result in higher interest payments over the loan’s term. Additionally, choosing this course of action usually entails taking out a larger loan than the value of your new vehicle, increasing your chance of going into debt once more.
- The trade-in value less your remaining balance must be paid. You can pay the difference between what you owe on your current loan and what the dealer is offering you for your trade-in if you have the money on hand. This can help keep your new loan amount lower.
- Delay the trade-in. You could also hold off on trading in your vehicle until your auto loan is paid off or, at the very least, you are no longer in debt.
How soon can you trade in a financed car?
A financed car can be traded in at any time, but you might want to wait a year or longer, particularly if you recently purchased a new vehicle. Cars depreciate over time. A brand-new car can lose value by as much as 2020 percent or more in the first year of ownership, and then it loses value more gradually over the next few years. You might discover that you have negative equity in your car almost immediately, depending on how much of a down payment you made on your loan and how quickly the value of your car has decreased.
How do you trade in a car with a loan?
Getting a good trade-in value is important because the more you can use toward the purchase of a new car, the better. Here are some steps to take.
Research the value of your trade-in vehicle
Understanding the estimated fair market value of your car will give you some negotiating leverage and help you gauge what a dealer might offer for your trade-in. You can use tools on websites like Edmunds and Kelley Blue Book to determine the trade-in value of your car based on details like the model, year, and amount of miles on the odometer.
You should evaluate the difference between the estimated trade-in value of your car and the amount of your loan payoff to determine whether you have positive or negative equity. This may differ slightly from your loan balance because it includes your loan balance plus any accrued interest and fees. Contact your lender to find out your payoff amount.
If your equity is positive, you can pay off your current loan with the amount the dealer offers you for your trade-in and apply any remaining funds as a credit toward the purchase of a new vehicle. However, you will have to choose whether to defer your trade-in, pay off your current loan, or roll over your loan balance into your new auto loan if you have negative equity.
Compare trade-in offers and negotiate
Contact a few dealers to get trade-in value estimates. Utilizing the car value estimates you did your research on, you can bargain if you think a dealer is giving a lowball price. Obtaining several quotes will help you ensure that you receive the best offer possible for your circumstances.
Negotiate the terms of your trade-in and the purchase of a new car separately. To offset a large trade-in amount, some dealers might attempt to mark up the price of the new vehicle. Before agreeing to a deal, make sure you understand the entire loan amount, annual percentage rate, loan term, and your new monthly payment if you have negative equity and choose to roll over your current loan balance into your new loan.
Close the deal
It’s time to seal the deal after you’ve decided on the price of the new car and the value for your trade-in. Examine the sales contract thoroughly; it should include details about your new loan amount, term, interest rate, and monthly payment, in addition to any verbal commitments made during the negotiation process. Additionally, it ought to explain how any negative equity is being managed. Certain dealers may make claims that they will settle your auto loan regardless of the remaining balance, but in reality, they will simply roll over any negative equity into your next loan.
Alternative to a trade-in
There is more than one way to trade in your vehicle at the dealership. It may be necessary to notify your lender beforehand if you decide to sell your car to a private buyer. Even though it might take longer, selling your car privately will probably fetch you more money than trading it in at a dealer, which could help offset any negative equity.
Ask an expert about trading in a car with an outstanding loan
Meet the expert: Brian Moody, executive editor for Autotrader and spokesperson for Kelley Blue Book, has more than 12 years of experience as an automotive journalist.
Is it a good idea to trade in a car when you’re paying off a loan on the same vehicle?
“Generally speaking, no. When you still owe money on the loan you took out to buy the car, trading it in is not a smart idea. It is feasible, but all the dealership will do is tack on the remaining loan amount to the cost of your new vehicle. Verify that you can pay off your loan early on If not, the dealership might charge you that amount. ”.
What should consumers be aware of when trading in a car with a remaining loan?
“The amount owing on your previous loan will be rolled over into the total cost of the vehicle with your new loan.” This implies that the cost of the car and the financing have increased. ”.
Do you have any negotiating power when trading in a car with a loan?
“Maybe. It could be beneficial if you have a highly sought-after and well-liked model. Additionally, you will still have some wiggle room if you owe very little on the previous car. Remember, there’s no free money. The dealership does not want to help you get out of a car that you overpaid for; it wants to make money selling goods. ”.
Finding out how much you owe on your car and its estimated value are crucial first steps when trading in a car that you have a loan for. In the long run, trading in an automobile with negative equity may prove to be a costly decision.
Consider trading in your current vehicle for a less expensive one if you need to roll over some negative equity in order to finance the car you want. Even though you will still need to carry over the negative equity from your existing auto loan, the total amount you borrow will be less, and you might even pay less in interest overall.
FAQ
How does trading a car in with a loan work?
The dealership gets in touch with your lender: Usually, the dealership will get in touch with your lender and use the credit from your trade-in value to fully repay your initial loan. After the trade-in credit is applied, if you still owe money, that amount will be carried over and added to the balance of your subsequent auto loan.
Is it smart to trade in a car that isn’t paid off?
However, if you have a balance on your current auto loan, you may be encouraged to roll that balance into a new loan, which will increase your total loan costs and the interest you’ll pay over the life of your loan. Trading in a car generally helps you reduce how much you’ll need to borrow when buying another vehicle.
How do I trade in a financed car I still owe on?
Finalize and negotiate: You can work out a deal with the dealer on the cost of the new vehicle and the amount they will pay you for your old vehicle. The dealer or lender may roll the difference into a new loan if the trade-in offer is insufficient to pay off your existing loan.
Does trading in a financed car hurt your credit?
Thus, you don’t have to worry about your credit when you determine the value of your car and sell it to the dealer. However, if you intend to finance the sale or trade-in of your vehicle for a different model, the inquiry procedure may have an effect on your credit score. However, the vehicle trade-in itself carries no weight.
Read More :
https://www.nerdwallet.com/article/loans/auto-loans/trade-in-car-when-you-owe-money