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Your Guide: Can You Trade In A Car While Financing Explained
Yes, you can trade in a car even if you still owe money on the loan. Many people do this. When you trade in a car with a loan, the dealership handles the process of paying off your outstanding car loan balance as part of the deal for the new car. It’s a common way to get into a different car before your current loan is fully paid off. However, the process involves figuring out your car’s worth, how much you still owe, and how those numbers compare.
Finding Out Your Car’s Worth and What You Owe
Before you go to a dealership, you need two main numbers. These numbers will tell you if trading in makes sense right now.
Your Car’s Worth: The Trade-In Value
The first number is your car’s worth in the current market. Dealerships call this the car trade-in value. This is the price the dealership is willing to give you for your old car. This amount will be taken off the price of the new car you want to buy.
Several things affect your car’s trade-in value:
- The car’s age: Older cars are usually worth less.
- How many miles it has: High mileage lowers the value.
- Its condition: Dents, scratches, needed repairs, and worn insides make it worth less.
- Its make and model: Some cars hold their value better than others.
- Market demand: How much people want your specific type of car right now matters.
You can get an idea of your car’s value online. Websites like Kelley Blue Book (KBB) or Edmunds can give you an estimate. Put in your car’s details and its condition. Keep in mind these are just estimates. The actual value the dealership gives you might be different.
What You Still Owe: The Payoff Amount
The second number you need is how much money you still owe on your current car loan. This is called the car loan payoff amount. It’s not just your last monthly payment amount times the remaining months. The payoff amount is the exact total needed to pay off the loan completely today or within a short time (usually 7-10 days). It includes the main loan amount left plus any interest built up since your last payment.
To get your payoff amount:
- Call your loan company. Ask for the exact payoff amount.
- Get a written statement if possible. This payoff quote is often good for a specific time period.
- Know the date the quote is good until. This is important.
Knowing both your car’s trade-in value and your loan payoff amount is key. It helps you see if you have positive equity or negative equity.
Comprehending Equity: Positive or Negative
Equity is the difference between your car’s value and how much you still owe on its loan.
What is Positive Equity?
You have positive equity when your car’s car trade-in value is more than your car loan payoff amount.
Think of it like this:
Car Value – Loan Amount = Money Left Over
If the money left over is a plus number, you have positive equity. This is good for trading in.
Example:
Your car is worth $10,000 (trade-in value).
You still owe $8,000 (payoff amount).
$10,000 – $8,000 = $2,000.
You have $2,000 in positive equity. This means your car is a positive equity car.
What is Negative Equity?
You have negative equity when your car loan payoff amount is more than your car’s car trade-in value.
Think of it like this:
Loan Amount – Car Value = Money You Still Owe
If the money you still owe is a plus number, you have negative equity. This means you are upside down on your car loan.
Example:
Your car is worth $8,000 (trade-in value).
You still owe $10,000 (payoff amount).
$10,000 – $8,000 = $2,000.
You have $2,000 in negative equity. You owe $2,000 more than the car is worth.
Trading in car with negative equity is possible, but it adds complexity to the deal.
How Trading In Works With a Loan
When you trade in your car at a dealership while it has a loan, the dealership takes over the job of paying off your old loan.
Here is a simple look at the steps involved in a dealership trade-in with loan:
- You find a new car you want to buy.
- You agree on a price for the new car.
- The dealership looks at your old car and gives you a trade-in value for it.
- The dealership finds out your exact car loan payoff amount.
- They pay off your old loan company the full payoff amount.
- The amount they pay off is then figured into your new car deal.
How it is figured in depends on whether you have positive or negative equity.
What Happens With Positive Equity
If your car trade-in value is more than your car loan payoff amount, you have positive equity.
The dealership pays off your old loan. The extra money from your positive equity can be used in two main ways:
- Lower the price of the new car: The dealership takes your positive equity amount off the price of the new car you are buying.
- Use it as a down payment: The positive equity money acts like cash you are putting down on the new car. This lowers the amount you need to borrow for the new car.
Having positive equity makes trading in smoother and puts you in a better position for your next loan. You start your new loan owing less money, which is always good.
Let’s use the earlier example:
Car Trade-In Value: $10,000
Car Loan Payoff Amount: $8,000
Positive Equity: $2,000
Dealership process:
* They pay your old loan company $8,000.
* The extra $2,000 is yours.
* You can use that $2,000 to lower the price of the new car or as a down payment on your new car loan.
This is the best situation to be in when trading in a financed car.
What Happens With Negative Equity
If your car loan payoff amount is more than your car trade-in value, you have negative equity. You are upside down car loan. This is more common than many people think.
When you trade in a car with negative equity, the dealership still pays off your old loan for the full payoff amount. But now, there is no extra money. Instead, there is an amount you still owe, even after using the car’s trade-in value.
Let’s use the earlier example:
Car Trade-In Value: $8,000
Car Loan Payoff Amount: $10,000
Negative Equity: $2,000 (You owe $2,000 more than the car is worth).
Dealership process:
* They pay your old loan company $10,000.
* Your car’s trade-in value is $8,000.
* This leaves a difference of $2,000 ($10,000 paid off – $8,000 value received).
* This $2,000 is your negative equity. You still need to deal with this amount.
Options for Dealing with Negative Equity
When trading in car with negative equity, you have a few choices for handling the amount you still owe:
1. Pay Off the Difference Out of Pocket
The cleanest way to handle negative equity is to simply pay off existing car loan difference with cash or a check right then.
Example: You have $2,000 negative equity. You write the dealership a check for $2,000.
* Pros: Your new car loan is only for the new car’s price (minus any down payment). You start fresh without adding old debt. This means lower monthly payments and less interest over time on the new loan.
* Cons: Requires having that much cash available.
2. Roll Over the Negative Equity into the New Loan
This is a very common option, but it can be risky. Rolling over car loan means adding the amount of your negative equity from the old car loan onto the amount you borrow for the new car.
Example: You have $2,000 negative equity. The new car costs $20,000.
Instead of financing $20,000 (minus any down payment), you would finance $20,000 + $2,000 = $22,000 (minus any down payment).
- Pros: You don’t need cash upfront to cover the negative equity. You can still trade in your car even if you are upside down.
- Cons: Your new loan amount is higher than the price of the new car. This means higher monthly payments. You start your new loan already owing more than the car is worth. You will likely be upside down on your new car loan from day one. This makes it harder to trade in or sell this new car later on. It also means you pay interest on the negative equity amount.
3. Sell the Car Yourself (Might Get More)
Sometimes you can get a higher price selling your car yourself than trading it in at a dealership. If you sell it for more than your payoff amount, you could avoid negative equity or at least reduce it.
Example: You owe $10,000. Dealership offers $8,000 (negative equity $2,000). You sell it to a private buyer for $9,500. You only need to pay the remaining $500 of the loan yourself ($10,000 payoff – $9,500 sale price).
* Pros: Can reduce or eliminate negative equity. You might get closer to what the car is truly worth.
* Cons: Takes more time and effort (advertising, showing the car, dealing with buyers). You have to handle the loan payoff yourself.
Selling it yourself is one option for how to trade in financed car, although it’s more accurately “how to sell a financed car” before buying another.
4. Keep the Car Longer
If you have significant negative equity, sometimes the best financial choice is to keep your current car. Keep making payments. Your loan balance goes down with each payment. The car’s value goes down over time, but usually slower than your loan balance if you are past the very first few years of the loan. Eventually, you will owe less than the car is worth, putting you in a better equity position.
- Pros: Avoids adding debt to a new loan. Gives you time to build positive equity.
- Cons: You have to wait to get a new car.
Deciphering the Dealership Process with a Loan
When you do a dealership trade-in with loan, here is generally how to trade in financed car through them:
- Tell them you have a loan: Right from the start, let the salesperson know your car has an outstanding loan.
- They will value your car: They will inspect your car and give you a trade-in value offer. This offer is separate from the price of the new car at this stage.
- They get your payoff amount: You will likely need to provide your loan company’s information. The dealership will contact your loan company to get the official car loan payoff amount. They need this exact number to finalize the deal.
- Working the numbers: The dealership will figure out the deal based on the price of the new car, your trade-in value, and your loan payoff amount.
- If positive equity: They apply the positive equity amount ($ Trade-in Value – $ Payoff) towards the new car price or as a down payment.
- If negative equity: They add the negative equity amount ($ Payoff – $ Trade-in Value) to the price of the new car you will finance (this is rolling over car loan). Or they might ask you to pay the negative equity amount upfront.
- Signing the paperwork: If you agree to the deal, you will sign papers for the new car loan. This new loan amount will include any rolled-over negative equity. The papers will also show the trade-in amount given for your old car.
- Dealership pays off your old loan: After the new car purchase is complete, the dealership sends the car loan payoff amount directly to your old loan company. This settles your old debt. Your old loan is closed.
- Transferring ownership: The dealership handles the title transfer for your old car to them. The new car title will be put in your name, usually showing the new lender as the lienholder.
It’s important to get copies of all paperwork. Make sure the documents clearly show:
* The price of the new car.
* The amount given for your trade-in.
* The car loan payoff amount for your old loan.
* How the trade-in and payoff were applied to the new deal (e.g., how much negative equity was rolled over).
* The final amount you are financing for the new car.
You should also follow up with your old loan company after a week or two. Make sure they received the payment from the dealership and that your old loan account is closed with a zero balance.
Tips for Trading In While Financed
Trading in a financed car can be easy, but it’s smart to be prepared. Here are some tips to help you get the best deal:
- Do Your Homework First:
- Find your estimated car trade-in value using online tools before you go to the dealership. Look at sites like KBB, Edmunds, and NADA Guides. Get several estimates.
- Get your official car loan payoff amount from your lender. Write down the valid-until date. This is a firm number you need to know.
- Know Your Equity: Calculate if you have positive or negative equity. Trade-in value minus payoff amount tells you this. Knowing this number is powerful when talking to the dealership.
- Understand Negative Equity Options: If you have negative equity, decide before you go how you prefer to handle it. Can you pay it in cash? Are you willing to roll over car loan? Knowing your plan helps you stick to it.
- Shop Around: Don’t just go to one dealership. Different dealerships might offer different trade-in values for your car. They might also offer different prices for the new car or different loan rates. Compare offers.
- Keep the Deals Separate (Initially): When talking numbers, try to talk about the price of the new car and the value of your trade-in as two separate things first. This makes it clearer. Sometimes dealerships bundle everything into one monthly payment number, which can hide a bad trade-in value or a high new car price.
- Be Ready to Walk Away: If the numbers don’t work for you, it’s okay to say no and leave. Maybe the trade-in offer is too low. Maybe the terms for financing the negative equity aren’t good. There will be other chances to buy a car.
- Clean Up Your Car: A clean car, inside and out, gives a better first impression. Fix any small, cheap things like burnt-out light bulbs. Have service records ready if you have them. This can sometimes help your car trade-in value.
- Understand the Total Cost: Focus on the total price of the new car and the total amount you are financing, not just the monthly payment. A low monthly payment might mean a longer loan term or a higher interest rate, costing you more over time, especially if you rolled over negative equity.
Knowing how to trade in financed car involves understanding the process and your own financial situation clearly.
Possible Issues and Things to Watch Out For
While trading in a financed car is normal, there are some potential problems to be aware of:
- Underestimating Negative Equity: If you don’t get your official car loan payoff amount and just guess, you might owe a lot more than you think. This leads to a shock at the dealership and possibly a much larger amount of negative equity to deal with. Always get the official number.
- Rolling Over Too Much: If you have significant negative equity and roll it all into your new loan, you could end up with a very large new loan. This makes monthly payments high and can make it very hard to get positive equity on the new car for a long time. You could easily be upside down car loan again quickly.
- Focusing Only on Monthly Payment: Dealerships often talk about the monthly payment. While important for your budget, a low monthly payment can be achieved by stretching the loan term (e.g., 72 or 84 months). A longer loan term means you pay a lot more interest over the life of the loan. If you have negative equity rolled in, a long term just means you stay upside down longer.
- Not Comparing Offers: Accepting the first offer means you might miss out on a better deal elsewhere. One dealership might offer a higher trade-in value, or a better interest rate on the new loan (especially if you have negative equity).
- Gap Insurance: If you roll over car loan (negative equity) into your new loan, you are financing more than the new car is worth. In this case, Gap insurance is very important. Gap insurance covers the ‘gap’ between what you owe on the loan and what the car is worth if it is stolen or totaled. If you rolled over negative equity, the gap can be very large. Make sure you understand if you need it and if it’s included or an extra cost.
Handling trading in car with negative equity requires careful thought. Sometimes, fixing the negative equity before you trade in is the best move. This might mean paying extra on your current loan for a few months or paying a chunk of cash to lower the balance before you try to trade it in.
Comprehending the Decision to Trade In
Trading in a financed car is a big decision. It has financial impacts, especially related to your existing loan.
Reasons people trade in a car while still financing include:
- Needing a different type of vehicle (bigger, smaller, more fuel-efficient).
- Current car has mechanical problems.
- Wanting newer safety features or technology.
- Changing jobs or life situations.
- Wanting lower maintenance costs of a newer car.
However, if you are upside down car loan, trading in car with negative equity means that old debt follows you. It doesn’t disappear. You either pay it now, or you add it to your next loan, increasing your future payments and interest costs.
Deciding how to trade in financed car depends on your personal financial health.
- If you have positive equity or can pay off the negative equity: Trading in is usually straightforward.
- If you have negative equity and need to roll it over: Think carefully about the effect on your new loan. Can you afford the higher payments? How long will it take to get positive equity on the new car? Is it worth starting your new loan underwater?
Sometimes, waiting a year or two, making extra payments on your current loan (specifically targeting the main loan amount, not just interest), can significantly improve your equity situation. This might put you in a much better spot to trade in later without negative equity problems.
A Look at the Numbers (Example Table)
Let’s compare two scenarios when trading in a car with a $9,000 payoff amount.
| Item | Scenario A: Positive Equity | Scenario B: Negative Equity |
|---|---|---|
| Your Car’s Payoff Amount | $9,000 | $9,000 |
| Dealership Trade-In Value | $10,000 | $7,000 |
| Your Equity | +$1,000 (Positive) | -$2,000 (Negative) |
| New Car Price | $25,000 | $25,000 |
| How Equity Affects New Deal | $1,000 is applied to new car | $2,000 needs to be handled |
| Option 1: Pay Negative Equity | N/A | Pay $2,000 cash upfront |
| Amount to Finance (Option 1) | $25,000 – $1,000 = $24,000 | $25,000 |
| Option 2: Roll Negative Equity | N/A | Add $2,000 to new loan |
| Amount to Finance (Option 2) | $25,000 – $1,000 = $24,000 | $25,000 + $2,000 = $27,000 |
As you can see, negative equity directly increases the amount you need to finance for the new car unless you pay it upfront. This directly impacts your monthly payments and total interest paid.
Final Thoughts on Trading In While Still Owing
Trading in a car with an outstanding car loan balance is a common and achievable process. The key steps are always:
1. Figure out your car’s car trade-in value.
2. Get your official car loan payoff amount.
3. Calculate your equity position (positive or negative).
4. Understand how positive or negative equity affects the new car deal.
5. If negative equity, decide how you will handle it (pay cash, rolling over car loan, etc.).
Knowing these things puts you in a much better position when talking to a dealership. It helps you understand the numbers they give you and make smart choices. While a dealership trade-in with loan is convenient, always do your research first. Make sure the deal makes sense for your budget and long-term financial goals. Don’t let the desire for a new car push you into a deal that puts you in a worse financial spot, especially if it means adding a lot of negative equity to your new loan.
Frequently Asked Questions (FAQ)
Can I trade in my car if I owe more than it’s worth?
Yes, you can. This is called having negative equity or being upside down car loan. The amount you still owe after using the car’s trade-in value will need to be paid. You can either pay this amount in cash or, more commonly, add it to your new car loan (rolling over car loan).
How do I find out my car loan payoff amount?
You need to contact your current car loan lender. Ask for the exact payoff amount. This is the total amount needed to close your loan today. Be sure to ask how long this quote is good for.
How is my car trade-in value decided?
Dealerships look at your car’s age, miles, condition, make, and model. They also consider local market demand. They will inspect your car to give you their offer. You can get estimates online beforehand to have an idea of what to expect.
What is the difference between positive equity car and negative equity?
Positive equity means your car’s trade-in value is more than your car loan payoff amount. Negative equity means your payoff amount is more than the trade-in value.
What does rolling over car loan mean?
It means taking the amount of negative equity from your old car loan and adding it to the amount you are borrowing for your new car. You finance the price of the new car plus the old debt.
Is it bad to trade in a car with negative equity?
It’s not necessarily bad, but it costs you money. You are paying off old debt plus buying a new car. If you roll the negative equity over, you start your new loan owing more than the new car is worth. This can lead to higher payments and staying upside down on the new car for a long time. It’s better financially if you can pay off existing car loan negative equity amount upfront.
How does a dealership trade-in with loan work?
The dealership gives you a trade-in value for your old car. They get your official car loan payoff amount. They pay off your old loan company. They then add any negative equity to your new car loan or reduce the new car price by your positive equity. You finance the final amount.
Will the dealership pay off my old loan directly?
Yes, in a standard dealership trade-in with loan, the dealership handles paying off your old lender directly as part of the new car purchase transaction. This ensures the title for your old car is cleared so they can take ownership.
What if I still owe a lot on my car? Can I still trade it in?
Yes, you can still trade it in even if you owe a lot. The main question is whether your outstanding car loan balance is more or less than the car’s current value. If you owe much more (significant negative equity), you will need to deal with that difference as part of the new car purchase.