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Trading in a Car With a Loan

trading in a car with a loan
TABLE OF CONTENTS

Are you ready to trade in your current vehicle for a new car, truck, or SUV but still owe money on your automotive loan? Here’s your guide to trading in a car with a loan.

Can You Trade in a Car That Isn’t Paid Off?

The simple answer is yes; you can trade in a car that you’re still paying for. However, you should first determine how much equity you have in your vehicle and whether it’s positive equity or negative equity. Positive equity means you owe less than what your car is worth, while negative equity means you owe more than what your car is worth. Negative equity is also known as being “upside-down” or “underwater” on your loan.

If you’re trading in a vehicle with positive equity, the dealership will apply your equity to your new purchase, reducing the amount you’ll have to finance. When trading in a vehicle with negative equity, you’ll need to consider the following options:

  • Rolling the negative equity into your new car. While rolling your negative equity into your new purchase is convenient, it will increase the amount of your loan, which means you could end up paying more interest over the life of the loan. It also means that you’ll have to borrow more than your new vehicle is worth, putting you at risk for another upside-down loan.
  • Paying off the difference. If you have the available funds, you can pay off the difference between your trade-in value and what you still owe on your loan. Doing so can lower your new loan amount.
  • Holding off on trading in your vehicle. You can wait to trade in your car until after you’re no longer upside down on your loan or the loan is paid off. Remember that if you’re thinking about paying your loan off early, some lenders charge prepayment penalties.

How Soon Can You Trade in a Car After Financing It?

You can trade in your financed vehicle any time you want to, although sometimes it’s a good idea to wait. For example, suppose you purchase a brand-new car and, after a few months of driving it, you’re ready to trade it in. You’ll probably find that you have negative equity because a brand-new car can depreciate by up to 20% within the first year of ownership. After the first year of ownership, depreciation rates slow down, so you should consider delaying your trade-in.

When Should You Trade in a Car With a Loan?

In certain situations, it makes sense to trade in your car even if you’re still paying it off. For example, you might want to trade in your current vehicle if:

  • Ownership costs are overwhelming. If you’re spending too much money on gas, repairs, or specialty parts, trading in your car might be better for your budget. You can save money over time if you trade your current car for one that’s more fuel-efficient and less complicated to repair.
  • The dealership is offering great incentives. Suppose your local dealerships are offering money-saving incentives. In that case, you can get a good deal on a better vehicle, especially if you have positive equity to put toward your new purchase. Keep an eye out for dealerships that need to clear out old stock to make way for new models.
  • You know exactly what kind of car you want. If you’ve done your research, know all of your options for financing, and know the exact vehicle you want, it makes sense to visit the dealership to see if you can get a new car at a price you’re happy with.

How to Trade in a Car With a Loan

If you’ve decided that you want to trade in your car before paying it off, here are the steps to trading in a car with a loan:

  • Gather the necessary paperwork. When you trade in your car, the dealership will require the following documents:
    • Your driver’s license
    • Proof of income and address
    • Your loan account number and how much you owe
    • Proof of insurance
  • Determine your car’s trade-in value. Knowing your car’s value will help you determine if you have positive equity or negative equity, how much money you’ll have left to put towards your new vehicle, and you’ll have a starting point for negotiations.
  • Shop around. Keep in mind that you don’t have to trade in your car with the same dealership that sells you your new vehicle. That’s why you want to request trade-in offers from several dealerships to see who offers the most money. Your goal is to get more money for your current vehicle than you owe on your loan.
  • Finalize the deal. After you get a trade-in offer that you’re happy with, you can complete the deal. The dealership will give you a check that you can use to pay off your lender, or they’ll pay your lender directly. If the dealership offers to pay your lender directly, follow up with your lender to ensure they get the payment.

Keep in mind that because you still have a loan on your car, the lender will be in possession of the title. While you need to be in possession of your vehicle title to sell your car privately, you do not need to have it in hand to trade in your car. The dealer, lender, and state Department of Motor Vehicles will work together to pay off the lender, get their lien off the title, and pass it along to the auction or whoever buys the car next.

What if You’re Leasing Your Current Vehicle?

Just as you can trade in a car with a loan, you can trade in a leased vehicle before the lease is up. You’ll want to contact your leasing company or review your leasing statement to see what the car’s payoff value is and if you’ll have to pay an early termination fee. After obtaining this information, you can contact the dealership where you’re purchasing your new vehicle, and they’ll work directly with your leasing company to complete the trade-in.

If your leasing company charges you any early termination fees, you probably won’t get the full trade-in value. If that’s the case, you might want to wait until your lease is up and exercise your purchase option.

Alternatives to Trading in a Car With a Loan

Instead of trading in your car to a dealership, you can sell it privately. Typically, you can make more money through a private sale than by trading it in because private buyers are willing to pay more than the trade-in value. Dealerships stick with the trade-in value or try to pay lower than that because they need to make a profit.

The lender still won’t release your title until the loan is paid off. If you can afford to pay off your loan before selling the car, the lender will mail your title to you, and you will be able to sell the car free and clear. Otherwise, the buyer will essentially be paying your loan off for you. The best case is if you go to your lender together and handle the transaction in person. If that isn’t possible, the buyer may be willing to give you the money to pay off the loan yourself, with a bill of sale and the vehicle itself as collateral that you will actually do so. Some buyers will not want to do this due to the potential financial risk involved.

Now that you know about trading in a car with a loan, you can do so confidently. Hopefully, you trade in your current vehicle for a car you’ll enjoy even more.

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

We’re here to help you simplify car care and save, so this post may contain affiliate links to help you do just that. If you click on a link and take action, we may earn a commission. However, the analysis and opinions expressed are our own.

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About the Author

FIXD Research Team

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

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