Can You Trade In a Financed Car? A Complete Guide to Understanding the Process
Owning a financed car offers the convenience of driving your desired vehicle while paying off a loan over time. However, circumstances change, and many people wonder whether they can trade in a financed car before paying it off entirely. The answer is yes—trading in a financed car is possible, but the process can be a little more complex than trading in a car you own outright.
This article will explore the steps involved in trading in a financed car, the financial considerations, how dealerships handle this situation, and frequently asked questions to ensure you have a complete understanding of the process.
How Does Trading In a Financed Car Work?
Trading in a financed car means selling your vehicle to a dealership while there is still an outstanding balance on your loan. The dealership will assess the value of your car, pay off the remaining loan balance, and credit any equity (if applicable) toward the purchase of your next vehicle.
However, if the car’s value is less than what you owe on the loan (negative equity), you may need to cover the difference, or in some cases, roll the remaining balance into a new loan for your next vehicle.
Understanding Loan Payoff and Equity
Before trading in a financed car, you must understand two key components: loan payoff and equity.
- Loan Payoff: This is the total amount you still owe on your car loan, including any interest and fees. Contact your lender to obtain the exact loan payoff amount, which is essential for the trade-in process.
- Equity: Equity refers to the difference between your car’s trade-in value and the remaining loan balance. If your car is worth more than what you owe, you have positive equity. If it’s worth less, you have negative equity.
Positive vs. Negative Equity: What It Means for You
When trading in a financed car, your financial situation will largely depend on whether you have positive or negative equity in the vehicle.
Positive Equity
Having positive equity means that your car is worth more than the remaining loan balance. For example, if your car’s trade-in value is $15,000 and you owe $10,000 on your loan, you have $5,000 in equity. This positive equity can be applied as a down payment on your next vehicle, reducing the amount you need to finance.
Negative Equity
Negative equity, also known as being “upside down” on your loan, means that you owe more on the car than it’s worth. For instance, if your car’s trade-in value is $10,000 but you owe $12,000, you have $2,000 in negative equity. In this case, you have two options:
- Pay the difference out-of-pocket to close the gap.
- Roll the negative equity into a new loan, meaning you will owe more on your new car than its actual value.
The Steps to Trading In a Financed Car
While the process of trading in a financed car may seem daunting, it’s fairly straightforward once you understand the steps involved. Here’s how you can trade in your financed car efficiently:
1. Check Your Loan Balance
Before anything else, you need to find out exactly how much you owe on your car loan. This amount is referred to as your loan payoff, which you can obtain by contacting your lender. Ensure the amount includes any outstanding fees or interest to avoid surprises during the trade-in process.
2. Determine Your Car’s Trade-In Value
Next, you need to know how much your car is worth. Several online tools, such as Kelley Blue Book or Edmunds, can help you estimate your car’s trade-in value based on factors like its make, model, age, mileage, and condition. You can also visit local dealerships to get a more accurate appraisal.
3. Evaluate Your Equity
Now that you know both your loan payoff amount and your car’s trade-in value, you can calculate whether you have positive or negative equity. Subtract your loan balance from the car’s trade-in value to determine your equity position. Positive equity means you have extra funds that can be applied to a new car, while negative equity means you’ll need to address the shortfall.
4. Shop Around for Trade-In Offers
Visit multiple dealerships to get a variety of trade-in offers. Each dealer may appraise your car differently, so it’s a good idea to compare offers. If one dealer gives you a better offer, you can use it as leverage when negotiating with another dealership.
5. Pay Off the Loan or Roll Over Negative Equity
If you have positive equity, the dealership will use your trade-in value to pay off your loan and apply the remaining balance as a down payment for your new vehicle. If you have negative equity, you’ll need to decide whether to pay the difference out-of-pocket or roll the remaining loan balance into your new car loan.
6. Finalize the Deal
Once you’ve settled on a trade-in offer and resolved any outstanding equity issues, you can finalize the deal. The dealership will handle paying off your old loan and setting up a new loan for your next vehicle. Make sure you review all the paperwork carefully to ensure that all terms and agreements are clear.
Pros and Cons of Trading In a Financed Car
Trading in a financed car can be a smart financial move in some cases, but it’s important to weigh the pros and cons before making a decision.
Pros:
- Convenience: Trading in your car at a dealership is convenient, as they will handle paying off the old loan and applying the trade-in value to your new vehicle.
- Upgrade Opportunity: If you’re ready for a new vehicle, trading in a financed car allows you to upgrade even if you haven’t finished paying off your current loan.
- Positive Equity: If you have positive equity, you can use it as a down payment on your new car, reducing your loan amount and monthly payments.
Cons:
- Negative Equity: If you’re upside down on your loan, you’ll either have to pay off the remaining balance out-of-pocket or roll it into a new loan, which could increase your overall debt.
- Depreciation: Vehicles depreciate quickly, and if your car’s value has significantly decreased, you may end up with negative equity.
- Higher Interest Rates: Rolling negative equity into a new loan can lead to higher interest rates, increasing your monthly payments and the total cost of the loan.
Trading In a Financed Car with Negative Equity
If you’re in a negative equity position, trading in your car can be more challenging, but it’s still possible. Here’s what you can do if you owe more on your car than it’s worth:
Pay the Difference
One option is to pay the difference between your loan balance and the car’s trade-in value. This is the simplest way to get out of a negative equity situation, but it requires you to have the necessary funds available.
Roll Over the Negative Equity
Another option is to roll the negative equity into your new car loan. While this allows you to trade in the car without paying anything out-of-pocket, it increases the amount you owe on the new loan. Be cautious with this option, as it can lead to higher monthly payments and more debt.
Wait and Pay Down the Loan
If possible, you can also choose to wait and pay down more of your loan before trading in the car. This approach can help you reduce or eliminate negative equity, putting you in a better position for a trade-in later.
Should You Trade In a Financed Car?
Deciding whether to trade in a financed car depends on your financial situation and goals. If you have positive equity, trading in can be a smart way to upgrade to a new vehicle and reduce your loan amount. However, if you have negative equity, it’s important to carefully consider your options and whether rolling over the balance or paying out-of-pocket makes sense for your budget.
If you’re struggling with high monthly payments, trading in a financed car may provide some relief, especially if you can negotiate a lower payment on your new loan. However, if you’re in a negative equity position, be cautious about taking on more debt by rolling the balance into a new loan.
FAQs
1. Can you trade in a financed car?
Yes, you can trade in a financed car even if you haven’t paid off the loan. The dealership will pay off the remaining loan balance and apply any equity toward your new car purchase.
2. What happens if I trade in a car with negative equity?
If you trade in a car with negative equity, you will either need to pay the difference out-of-pocket or roll the remaining balance into a new loan. This can increase your overall debt.
3. How do I know if I have positive or negative equity?
You can determine your equity by subtracting your loan payoff amount from your car’s trade-in value. Positive equity means your car is worth more than you owe, while negative equity means you owe more than the car is worth.
4. Can I trade in a car with bad credit?
Yes, you can trade in a car with bad credit, but your financing options for a new car may be limited. The dealership will consider your credit history when offering a loan for your next vehicle.
5. What if my car is worth less than what I owe?
If your car is worth less than what you owe, you have negative equity. In this case, you will need to either pay the difference or roll the remaining loan balance into a new loan.
6. Will trading in a financed car hurt my credit?
Trading in a financed car itself won’t hurt your credit, but taking on a new loan or missing payments on your old loan could negatively impact your credit score.
7. Can I trade in a leased car?
Yes, you can trade in a leased car, but the process differs slightly. The dealership will pay off the remaining lease balance and any early termination fees before applying any equity toward your new vehicle.
8. Should I trade in my car or sell it privately?
Selling your car privately may yield a higher price, but trading it in at a dealership is more convenient. Weigh the potential financial benefits against the ease of trading in before making a decision.
9. Can I trade in a financed car for a cheaper one?
Yes, you can trade in a financed car for a cheaper vehicle. If you have positive equity, you can apply it toward the purchase of the cheaper car, potentially lowering your monthly payments. If you have negative equity, you may need to pay off the difference or roll it into the new loan.
