Trading in your car is when you sell it to a dealership for credit that you can use to buy another vehicle. That credit reduces the overall cost of the new car, so trading in can be a great way to lower your monthly payments.
But what if you still owe money on your current car? Can you trade a car that is financed?
The answer is yes, but it’s a little more complicated than trading in a car you own outright. Here’s what you need to consider:
- What is the remaining balance on your loan?
- What is the market value of your car?
- What is the dealership offering you for your trade-in?
- Do you have negative equity (meaning you owe more than the car is worth)?
Let’s take a closer look at each of these factors.
Understanding Your Current Auto Loan
Before you start thinking about trading in your financed car, you need to gather some information about your current loan and the vehicle itself.
Loan Details and Information
First, find out who your lender is and get a copy of your loan agreement. The agreement will spell out all the details of your loan, including the interest rate and the length of the loan.
Then, find out how much you still owe on the loan. You can often find this information on your lender’s website or by contacting their customer service department. Having the exact payoff amount will be essential before you start talking to dealerships about a trade.
Assessing Your Car’s Market Value
Next, you’ll want to get an estimate of what your car is currently worth. Use online resources like Kelley Blue Book (KBB), Edmunds, and NADAguides to get an idea of the market value.
Keep in mind that the value will depend on the car’s mileage, condition (excellent, good, fair), and trim level. You should also be aware that the trade-in value you’ll get from a dealer is usually lower than what you could get if you sold the car privately.
While private sales can bring a higher price, they also require more effort on your part.
The Trade-In Process With a Loan
Trading in a car that still has a loan on it takes a little more legwork, but it’s a pretty common practice. Here’s what you can expect:
Getting a Trade-In Appraisal
Don’t just go to one dealership and take their word for it. Get appraisals from several dealerships. The more offers you have, the better you’ll understand the value of your car. Plus, you can use the offers to negotiate.
Before you take your car in, understand that the dealership is going to look at things like the car’s overall condition, the mileage, and what similar cars are selling for in your area. They’ll also look for things that could cost them money down the road, like mechanical problems or damage.
Negotiating the Trade-In Value
Experienced car buyers recommend that you negotiate the price of the new car separately from the trade-in value of your old car. Focus on getting the lowest possible price on the car you want to buy before you even mention that you have a trade-in.
It’s also important to know the value of your car and be willing to walk away if you can’t get a fair offer. The more prepared you are to explore other options, the more leverage you’ll have in negotiations.
Loan Payoff and Paperwork
The dealership will usually handle the loan payoff process for you. They’ll contact your lender to find out exactly how much you owe. Then, they’ll deduct that amount from the trade-in value they’re offering you.
Before you sign anything, take the time to read all the paperwork carefully. Make sure that the trade-in value, the loan payoff amount, and any balance you’re rolling over into the new loan are all listed correctly.
DEALING WITH NEGATIVE EQUITY
Trading in a car that’s financed is usually pretty straightforward, but things can get tricky if you have what’s called “negative equity.” Let’s break down what that means and how to handle it.
Understanding Negative Equity (Upside Down)
Negative equity is a fancy way of saying you owe more on your car loan than your car is actually worth. It’s also called being “upside down” on your loan. This is super common, especially with newer cars that lose value really fast after you drive them off the lot.
If you have negative equity when you try to trade in your car, you’ll need to deal with the difference between what you owe and what the dealership is willing to give you for your trade.
Options for Handling Negative Equity
So, what can you do if you’re in this situation?
- Pay the difference: If you have the cash, you can simply pay the dealership the difference between your loan balance and the trade-in value. This is the cleanest and simplest solution.
- Roll the negative equity into a new loan: This means adding the amount you still owe on your old car to the loan for your new car. While this might seem easy, it means you’re borrowing more money, which leads to higher monthly payments and more interest over the life of the loan. Think carefully about the long-term cost before you choose this option.
- Wait it out or make extra payments: If you’re not in a rush, consider waiting to trade in your car until you’ve built up more equity. You can also make extra payments on your loan to pay it down faster.
Risks of Rolling Over Negative Equity
Rolling over negative equity might seem convenient, but it comes with risks:
- Higher loan amount and interest: You’ll end up paying significantly more for your new car over time because you’re borrowing more and paying more interest.
- Increased risk of being upside down again: You could easily find yourself in the same situation with your new car, creating a never-ending cycle of negative equity.
ALTERNATIVES TO TRADING IN
Trading in your car isn’t the only way to get out from under your auto loan. Here are a couple of other strategies you may want to consider.
Selling the Car Privately
Selling the car yourself means you’ll have to do some research to decide if a private sale is right for you. You might get more money for the car than you would from a trade-in, but selling a car privately takes effort.
Selling a car privately means you’ll have to advertise the car, show it to prospective buyers, handle test drives, negotiate a price, and then handle all the paperwork involved in the sale. Be prepared to answer a lot of questions and haggle over the price.
Keeping the Car
Think about whether it makes sense to just keep the car and pay it off. Look closely at the long-term costs of owning the car, including maintenance, repairs, and insurance. How much will it cost you to keep it running for the next few years?
Paying off the loan and driving the car for several more years is sometimes the best option, financially. If you can make it work, you might be glad you kept your old ride.
Frequently Asked Questions
Can you turn in a financed car for another car?
Yes, you can typically turn in a financed car for another car, but it’s not quite as simple as just dropping it off. The process usually involves trading in the financed vehicle at a dealership. Here’s the catch: the dealership will assess the trade-in value of your current car. This value is then used to pay off your existing car loan.
If the trade-in value is less than what you still owe on the loan (this is called being “upside down” or “underwater” on the loan), you’ll need to cover the difference. You can do this by paying the difference out-of-pocket or, more commonly, rolling that negative equity into the new car loan. Rolling it into the new loan can increase your monthly payments and the overall amount you pay for the new vehicle.
If the trade-in value is more than what you owe, the extra money can be used as a down payment on your new car.
It’s always a good idea to get an estimate of your car’s trade-in value and check your loan balance before heading to the dealership so you know where you stand.
In Summary
Trading in a car that’s still financed can feel complicated, but it’s absolutely possible. Just remember to take a close look at a few key things. Know exactly how much you still owe on your loan, and get a realistic idea of what your car is worth right now. Be prepared for the possibility of negative equity – owing more than the car’s value – and understand all your options for dealing with it.
Take your time! Don’t rush into a deal. Shop around and compare offers from different dealerships. Make sure you fully understand the financial consequences of any decision you make. Can you comfortably afford the new payments? Will you be rolling negative equity into a new loan?
Trading in a financed car is doable, but it takes careful planning and research to avoid getting stuck in a bad financial situation. A little due diligence can save you a lot of headaches down the road.