Trading in a car can be a great way to upgrade to a new vehicle, but what happens if your current car is still under finance? Many drivers wonder whether it’s possible to trade in a financed car and how the process works. The good news is that it’s entirely possible, but there are important factors to consider before proceeding. This guide will walk you through the process, what to expect, and tips for making a smart financial decision.
Can You Trade In a Financed Car?
Yes, you can trade in a financed car, but there are some key details to understand. When you trade in a car that still has an outstanding loan, the dealership will typically handle paying off the remainder of your loan as part of the transaction. However, this may not always work in your favor financially, depending on the value of your car and the amount you owe.
Understanding Equity in Your Financed Car
Before trading in a financed car, it’s essential to know whether you have positive equity or negative equity:
1. Positive Equity
You have positive equity if the trade-in value of your car is greater than the amount you owe on the loan. For example:
- Your car’s trade-in value: $20,000
- Loan payoff amount: $15,000
In this case, you have $5,000 in positive equity, which can be applied toward the down payment for your next car.
2. Negative Equity
Negative equity, also known as being “upside-down” on your loan, occurs when the amount you owe is more than the car’s trade-in value. For example:
- Your car’s trade-in value: $15,000
- Loan payoff amount: $20,000
Here, you have $5,000 in negative equity. In this case, the dealership may allow you to roll the remaining debt into your new loan, but this can increase your monthly payments and overall debt.
Steps to Trade In a Financed Car
If you decide to trade in your financed car, follow these steps to ensure a smooth process:
1. Determine Your Car’s Value
Find out how much your car is worth by:
- Using online tools like Kelley Blue Book or Edmunds.
- Getting trade-in quotes from multiple dealerships.
- Considering private sale value (if you’re open to selling it yourself).
2. Check Your Loan Payoff Amount
Contact your lender to find out how much you owe on your car. This amount will include the remaining principal and any additional fees or interest.
3. Calculate Your Equity
Subtract your loan payoff amount from your car’s trade-in value to determine whether you have positive or negative equity.
4. Negotiate the Trade-In Offer
Shop around for the best trade-in offer. Some dealerships may offer more competitive values than others, especially if you’re purchasing your next car from them.
5. Understand Your Financing Options
If you have negative equity, discuss with the dealership how the remaining debt will be handled. Options include:
- Rolling the debt into your new loan.
- Paying off the negative equity upfront.
6. Complete the Transaction
Once you agree on terms, the dealership will:
- Pay off your existing loan.
- Apply any positive equity toward your new car purchase or handle negative equity as agreed.
Pros and Cons of Trading In a Financed Car
Pros
- Convenience: Trading in your car at a dealership simplifies the process, as they handle loan payoff and paperwork.
- Quick Transaction: You can trade in and buy your next car in one seamless transaction.
- Upgrade Opportunity: It allows you to upgrade to a newer or better vehicle without waiting for your current loan to be paid off.
Cons
- Negative Equity Risks: Rolling negative equity into a new loan can lead to higher monthly payments and long-term debt.
- Lower Trade-In Value: Dealership trade-in offers are often lower than what you might get through a private sale.
- Complex Financing: Managing two loans simultaneously (your old loan payoff and your new car loan) can be confusing.
Alternatives to Trading In a Financed Car
If trading in doesn’t seem like the best option, consider these alternatives:
1. Sell the Car Privately
Selling your car privately often yields a higher price than trading it in at a dealership. You’ll need to pay off the loan balance directly with the proceeds from the sale.
2. Pay Down the Loan First
If you’re close to paying off your loan, consider waiting until the balance is cleared before trading in your car. This can simplify the process and improve your financial position.
3. Refinance the Loan
If your monthly payments are too high, refinancing your car loan could lower your interest rate or extend the loan term, making payments more manageable while you wait to trade in.
Quick Statistics on Car Trade-Ins
- 61% of new car buyers trade in their old vehicle, according to Edmunds.
- 48% of trade-ins involve vehicles with negative equity.
- On average, dealerships offer 15-25% less for trade-ins than the vehicle’s private sale value.
Final Thoughts
Trading in a financed car is a straightforward process, but it requires careful consideration of your financial situation. Understanding your car’s equity, negotiating the best trade-in value, and weighing the impact of rolling over negative equity can help you make an informed decision.
If you’re prepared and aware of your options, trading in a financed car can be a convenient way to upgrade your ride and simplify your financial commitments. Just be sure to evaluate the long-term costs and benefits to ensure it’s the right move for you.