Yes, you can trade in a car that you still owe money on. Many people do this. It is a common way to get a new car. When you trade your financed car, the car dealer takes your old car. They use its value to help pay for the new car. But it involves paying off your existing car loan.
Image Source: fzblogimages.blob.core.windows.net
Figuring Out Your Car’s Worth and What You Owe
Trading a financed car starts with two main numbers. You need to know your car’s worth now. You also need to know how much you still owe on your loan.
Finding Your Car’s Value Now
Your car’s value is called its trade-in value. This is how much a car dealer will give you for it. Many things affect this value.
- How old is the car?
- How many miles has it driven?
- What condition is it in? Is it clean? Does it have dents? Does everything work?
- Is it a popular model?
- What options does it have?
- What is the market like? Are many people looking for a car like yours?
You can get an idea of your car’s trade-in value before you go to a dealer. Websites like Kelley Blue Book (KBB) or Edmunds can help. You put in your car’s details. They give you an estimated value. Remember, this is just an estimate. The dealer’s offer might be different.
Checking Your Existing Car Loan Amount
You also need to know exactly how much money you still owe on your car loan. This is called your loan payoff amount. It is not just the balance on your last statement. Payoff amounts can change daily because of interest.
You need to ask your lender for the official payoff amount. Call them or check your online account. They will give you a number. This number is usually good for a short time, like 10 days. This is the amount the dealer will need to pay your lender.
Decoding Equity: What It Means for Your Trade
Equity is the difference between your car’s value and what you owe on the loan. It is a very important idea when trading a financed car.
Exploring Positive Equity
Positive equity is good. It means your car is worth more than you owe on your loan.
Let’s say your car is worth $10,000 in trade-in value. You only owe $8,000 on your loan. You have $2,000 in positive equity ($10,000 – $8,000 = $2,000).
When you trade in the car, the dealer pays off your $8,000 loan. The extra $2,000 is money you have left over from the trade. You can use this money. It can be a down payment on your new car. This lowers how much you need to borrow for the new car. It makes your new car financing cheaper.
Comprehending Negative Equity
Negative equity is not so good. It means you owe more on your loan than your car is worth. People sometimes call this being “upside down on your car loan.”
Let’s say your car is worth $10,000 in trade-in value. But you still owe $12,000 on your loan. You have $2,000 in negative equity ($10,000 – $12,000 = -$2,000).
When you trade the car, the dealer uses the $10,000 trade value. But you still owe $2,000 to your lender ($12,000 – $10,000 = $2,000). This $2,000 is your negative equity.
Trading a car with negative equity is still possible. But you have to deal with that leftover debt.
Comparing Positive and Negative Equity
This table shows the difference simply.
| What is it? | Car’s Value vs. Loan Amount | Example: Car Worth $10k | What Happens? |
|---|---|---|---|
| Positive Equity | Car’s Value > Loan Amount | Owe $8,000 | You get money back from the trade-in ($2,000). |
| Negative Equity | Car’s Value < Loan Amount | Owe $12,000 | You still owe money after the trade-in ($2,000). |
Knowing if you have positive or negative equity is the first big step. It helps you know what options you have when you trade.
The Vehicle Trade-In Process with a Financed Car
The steps to trading a financed car are similar to trading a car you own fully. But there is one key extra step. The dealer has to handle your existing car loan.
Step 1: Get Your Loan Payoff Amount
Call your lender. Ask for the exact payoff amount for your existing car loan. Get this number in writing if you can. It should include the amount and the date it is good until.
Step 2: Find Your Car’s Trade-In Value
Use online tools to get an idea. Then, take your car to a few dealerships. Ask them what they would offer for your car as a trade-in. Different dealers might give different offers.
Step 3: Look at New Cars and Get Pricing
Find the new car you want. Get the full price of this new car. Do not talk about your trade-in right away. Agree on the price of the new car first if you can. This makes it easier to see the trade-in deal clearly.
Step 4: Talk About the Trade-In
Now, tell the dealer you want to trade your financed car. Give them the payoff amount you got from your lender. The dealer will make you an offer for your trade-in value.
Step 5: See How the Numbers Fit Together
This is where the math happens. The dealer looks at:
- The price of the new car.
- Your trade-in value.
- Your existing car loan payoff amount.
They figure out how much you need to borrow for the new car.
- If you have positive equity: Your trade-in value is more than the loan payoff. The extra money acts like a down payment. It lowers the new loan amount.
- If you have negative equity: Your trade-in value is less than the loan payoff. You still owe money on the old loan. This extra amount, the negative equity, usually gets added to your new car loan. This is called rolling the negative equity into the new loan.
Step 6: Figure Out New Car Financing
Once the dealer knows how much you need to borrow (the price of the new car, minus trade equity, plus negative equity if any), they work on your new car financing. They look at loan terms (how many months to pay) and interest rates. This gives you your monthly payment for the new car loan.
Step 7: Finishing the Paperwork
If you agree to the deal, you sign papers. The dealer takes care of paying off your existing car loan with your lender. They will handle getting the title from your old car’s lender. Your new loan starts for the new car.
What Happens to Your Existing Car Loan?
When you trade in your financed car, the car dealer pays off your existing car loan for you. This is a key part of the dealer payoff process.
The dealer sends the payoff amount directly to your lender. They use the trade-in value of your old car to help cover this amount.
- If your trade-in value is more than the payoff, the dealer pays the lender and gives you the extra money (your positive equity) to use on the new car.
- If your trade-in value is less than the payoff, the dealer still pays the full payoff amount to your lender. But the difference (your negative equity) is added to the price of your new car. You then owe this amount as part of your new car financing.
Once the dealer pays your lender, your existing car loan is closed. You no longer owe money on that old loan. The lien on your old car’s title is removed by the lender. The dealer then gets the title.
Dealing with Negative Equity When Trading
Trading a car with negative equity is common, but it needs careful thought. You have a few ways to handle the negative equity.
Option 1: Roll Negative Equity into the New Loan
This is the most common option. The amount you still owe on the old car after the trade is added to your new car loan.
- How it works: Let’s say you owe $2,000 in negative equity. The new car costs $20,000. Instead of borrowing $20,000, you borrow $20,000 + $2,000 = $22,000.
- Good points: You can drive away in a new car today. You do not need extra cash upfront to cover the old debt.
- Bad points: Your new loan amount is higher. This means higher monthly payments or a longer loan term. You start your new car ownership also owing more than the new car is worth. This can make it harder to trade that car later. You are paying interest on debt from your old car.
Option 2: Pay the Negative Equity with Cash
You can pay the dealer the amount of your negative equity with cash or a check.
- How it works: If you owe $2,000 in negative equity, you write a check for $2,000. The dealer uses your trade value plus your cash to pay off the old loan.
- Good points: Your new car loan is only for the price of the new car (minus any positive trade equity or down payment). Your monthly payments will be lower than if you rolled the negative equity. You start fresh with your new car loan.
- Bad points: You need cash readily available. Many people do not have extra cash for this.
Option 3: Try to Sell the Car Yourself
You might get more money selling your car yourself instead of trading it in. This is often called a private sale.
- How it works: You list your car for sale. You find a buyer and agree on a price. This price is often higher than a dealer’s trade-in value. You use the money from the sale to pay off your loan.
- Good points: You might get enough money to cover your loan fully, or even have a little left over. This avoids negative equity when you go to buy a new car.
- Bad points: Selling a car yourself takes time and effort. You have to advertise the car. You meet with potential buyers. You handle the paperwork. Selling a car with a lien requires working with your lender and the buyer to handle the title transfer correctly, which can be tricky. You also need to pay off the loan before you can give the buyer the title. This might mean paying the negative equity yourself first.
Option 4: Wait and Pay Down Your Loan
If your negative equity is high, you might decide not to trade right now. You can keep your current car. Keep making your monthly payments. Try to pay extra money each month if you can.
- How it works: Every payment lowers your loan balance. Paying extra lowers it faster. Over time, you might get closer to owing less than the car is worth.
- Good points: You reduce or remove your negative equity. This puts you in a better place to trade later.
- Bad points: You have to wait to get a new car.
How Negative Equity Affects New Car Financing
Rolling negative equity into your new car loan has big effects.
- Higher Loan Amount: As seen before, you borrow more money than the new car’s price.
- Higher Monthly Payments: A larger loan amount means you pay more each month to pay it back over the same time.
- Longer Loan Terms: To keep monthly payments lower, you might take out a loan for more months (like 72 or 84 months). This means you pay interest for a longer time.
- More Interest Paid: A higher loan amount and longer term mean you pay a lot more interest over the life of the loan.
- Faster to Be Upside Down Again: Because you start owing more than the new car is worth (the negative equity is added), it is very easy to be upside down on the new car quickly. Cars lose value fast when they are new.
Think carefully before rolling negative equity. It can make your new loan much more expensive over time.
Grasping the Lien on Your Title
When you finance a car, the lender holds a lien on your vehicle. A lien is a legal claim. It means the lender has the right to take the car if you do not pay back the loan.
The lien holder (the lender) is listed on the car’s title. You do not get the clean title until the loan is fully paid off.
When you trade a financed car, the dealer must pay off the loan to get the lien removed. This lets the dealer get the title. They cannot sell your old car until they have a clear title. This is why the dealer payoff process is necessary. The dealer deals directly with your lender to clear the lien.
Factors That Change Your Trade-In Value
Your car’s trade-in value is a key part of the deal. Several things make this value go up or down.
- Condition: Is your car clean? Does it have scratches or dents? Do all the features work? A car in good shape is worth more. Fixing small things before trading can sometimes help.
- Mileage: Higher miles usually mean lower value.
- Age: Older cars are usually worth less than newer ones.
- Make and Model: Some cars hold their value better than others. Popular cars that people want are worth more.
- Optional Features: Things like a sunroof, navigation, or leather seats can add value, but usually not as much as you paid for them.
- Maintenance: Having records that show you took good care of the car (oil changes, service) can help. It shows the car was well-maintained.
- Market Conditions: If there is high demand for used cars, your trade-in value might be higher. If there are many cars like yours for sale, the value might be lower.
Dealers look at all these things when giving you a trade-in offer.
Preparing for the Vehicle Trade-In Process
Being ready helps you get a better deal and makes the process smoother.
1. Get Your Paperwork Ready
- Find your car title, even if the lender holds it. Know which lender has the lien.
- Get the official payoff amount from your lender. Write down the amount and the good-until date.
- Gather service records. This shows you took care of the car.
- Have your car registration and proof of insurance.
2. Clean Your Car
Clean the inside and outside. Remove all your personal items. A clean car looks better and suggests it was cared for. This can sometimes help the trade-in value slightly.
3. Fix Small, Cheap Things
Maybe a taillight is out or a minor part is broken. If it is cheap and easy to fix, doing so might make the car look better to the dealer. Do not do expensive repairs, though. You usually will not get that money back in trade value.
4. Know Your Numbers
- Know your car’s estimated trade-in value (from online tools).
- Know your exact loan payoff amount.
- Know your equity (positive or negative).
- Know the price of the new car you want.
5. Shop Around
Get trade-in offers from a few different dealers. This helps you see what your car is really worth in the market. Do not feel you have to take the first offer.
Negotiating Your Trade-In
Negotiating the trade-in is part of buying a new car. It is about the whole deal, not just the trade value alone.
Separate the Deals
Try to agree on the price of the new car first. Then, talk about the trade-in. Dealers sometimes try to give you a high trade value but charge more for the new car. Or they give a low trade value but a big discount on the new car. Look at the “out-the-door” price for the new car after the trade is figured in. This is the total cost to you.
Know Your Value
Use the trade-in values you got from different places (online and other dealers). This gives you power in talking about the price.
Be Ready to Walk Away
If the deal does not work for you, be ready to leave and go to another dealer. This is your biggest tool in negotiating.
Think About the Total Cost
Look at the monthly payment, the loan term, and the total amount financed. If you have negative equity, make sure you understand how much you are adding to the new loan. Is the higher payment or longer term okay for your budget?
Are There Other Ways Besides Trading?
Yes, trading your financed car to a dealer is one way. Selling it yourself is another. What about selling it to a different type of buyer?
Selling to a Used Car Retailer
Places like CarMax or Carvana buy cars directly from owners. They will give you an offer for your car. This offer might be different from a franchised dealer’s trade-in value. They will also handle paying off your existing car loan. This can be a simpler process than selling it yourself. You still need to know your loan payoff amount. If you have negative equity, you will need to pay them the difference.
Selling to a Private Party (Detailed Steps)
Selling your financed car to a person directly can get you more money than a trade-in. But it takes more work and has steps related to the lien.
- Get Payoff Amount: Get the exact loan payoff amount from your lender.
- Find a Buyer: Advertise your car. Set a price based on market value (like KBB private party value).
- Buyer Gets Financing (Maybe): The buyer needs to get money to pay you. They might get a loan from their bank.
- Handle the Transaction with the Lender: This is the key part.
- The buyer pays you the agreed price.
- You immediately use that money to pay off your lender the full payoff amount.
- You might need to go with the buyer to your bank or the lender’s local branch (if possible) to do this.
- If the buyer’s bank is giving them a loan for the car, sometimes that bank will send the payoff amount directly to your lender. They handle the lien transfer. This is often the safest way for both sides.
- If the buyer pays you directly, and you have negative equity, you must use your own money to add to the buyer’s payment to cover the full payoff amount.
- Get the Title: Once your lender gets the full payoff, they remove the lien. They mail the clean title to you. This can take days or weeks.
- Transfer Title to Buyer: Once you get the title, you sign it over to the buyer. They can then register the car in their name.
Selling privately is more complex with a lien. Many buyers are hesitant to pay for a car when the seller does not immediately have the clear title. Using the buyer’s bank to handle the payoff is often the smoothest method.
Deciding If Trading Is Right for You
Trading a financed car is possible. But it is not always the best financial move, especially with negative equity.
When It Might Be a Good Idea
- You have positive equity. This gives you money to put towards the new car.
- Your current car has high repair costs. The cost of fixing it is more than the cost of a new car payment (considering total cost).
- You need a different type of vehicle (bigger, smaller, better fuel economy).
- Interest rates for new car loans are very low.
- You can get a good deal on the new car and a fair value for your trade.
When You Should Think Twice
- You have significant negative equity. Rolling a large amount into a new loan is expensive. It puts you upside down on the new car immediately.
- Your current car is reliable and affordable to keep.
- Interest rates for new loans are high.
- The trade-in value offered is very low.
- You are trading just because you are tired of your car, not out of need.
Calculate the total cost of the new car loan, including any rolled-in negative equity. Compare it to keeping your current car. Sometimes, paying extra on your current loan to build equity is a better long-term plan.
Common Questions About Trading Financed Cars
How much negative equity is too much to roll over?
There is no set rule. It depends on your budget and how much you are willing to pay extra each month or over the loan term. Rolling a small amount might be okay. Rolling several thousand dollars means a much larger new loan and higher costs. Lenders also have limits on how much negative equity they will allow you to roll into a new loan.
Can I trade in a car that is not working?
Maybe. The dealer will offer a much lower trade-in value, maybe just its scrap value or value for parts. The trade value will likely be far less than what you owe. You will probably have very high negative equity.
Will trading in my financed car hurt my credit score?
Closing your old loan and opening a new one will show on your credit report. This can temporarily lower your score slightly. However, making payments on your new loan on time will help build your credit over time. If you were late on payments for the old loan, trading it and starting fresh with on-time payments on the new loan can ultimately help your credit score recover. Rolling negative equity means you are borrowing more, which affects your credit utilization, but the impact varies.
Can I trade my financed car if I have missed payments?
Trading a car with missed payments is very hard, maybe impossible, with a standard dealer trade-in. Your loan is not in good standing. The dealer works by paying off the current loan. If your account is not current, the lender might not accept a standard payoff amount or release the lien easily. You would need to bring the loan current first, which might require a large payment.
Do I need to tell the dealer my car is financed?
Yes, you must tell the dealer your car is financed and that there is a lien holder. The dealer needs to know this to get the payoff amount and handle the title transfer correctly. Hiding this information will cause problems later and can be seen as dishonest.
What happens if I trade in my car but the dealer does not pay off the old loan?
This is very rare with reputable dealerships, but it is a serious problem. Your old loan is still your responsibility until it is paid off and the lien is released. You should get proof from the dealer that the payoff was sent. Keep making payments on the old loan until you get confirmation from your old lender that the loan is paid in full and the account is closed. If the dealer fails to pay, contact them immediately. If they do not fix it, contact your old lender and consider legal advice. Check your credit report to see if the old loan shows as closed.
How quickly does the dealer pay off the old loan?
Usually within a few days after you sign the paperwork for the new car. The time can vary depending on the dealer and the lender. You should confirm the timeline with the dealer.
Trading a financed car is a process with several steps. Knowing your car’s value, how much you owe, and what equity you have is key. Understand how the dealer payoff works and what happens to your existing car loan and lien. Be prepared to deal with negative equity if you have it. By doing your homework and knowing your numbers, you can make a good decision about trading your financed car for another vehicle.