Can I Trade In a Car on Finance & How It Works?

It is possible to trade in a car with an outstanding loan. Dealerships frequently facilitate this, managing your existing financial obligation to transition into a new vehicle.

Understanding Your Current Vehicle’s Financial Standing

Before a trade-in, understand your vehicle’s financial position: the exact loan payoff amount and estimated market value. These figures allow for an informed decision.

Contact your auto loan lender for a “10-day payoff quote.” This quote includes principal, accrued interest, and potential fees, valid for about 10 days. It differs from your last monthly statement because interest accrues daily.

Assess your vehicle’s market value using online tools like Kelley Blue Book (KBB), Edmunds, and J.D. Power. They estimate trade-in value based on make, model, year, mileage, condition, and location, considering vehicle history, features, and market demand. Trade-in value is typically less than private sale value, as dealerships account for reconditioning and profit.

Determining Your Equity Position

Understanding your car’s equity is important for a trade-in. Equity is your financial stake, calculated by comparing market value to outstanding loan balance, revealing positive or negative equity.

Positive equity occurs when your car’s market value exceeds the loan amount. For example, a $20,000 car with a $15,000 loan has $5,000 positive equity. This surplus can be applied toward your next vehicle’s down payment, potentially reducing the new loan or lowering monthly payments.

Conversely, negative equity, often called “upside down” or “underwater,” means you owe more than your car is worth. For instance, an $18,000 loan on a $15,000 car means $3,000 negative equity. This can arise from rapid depreciation, a small down payment, or a long loan term. If you trade in with negative equity, the deficit needs to be addressed during the new vehicle purchase.

Navigating the Trade-In Process

Trading in a financed car at a dealership involves several steps. The dealership appraises your vehicle to establish its trade-in value, considering its condition, mileage, service history, and market demand.

If you accept the dealership’s trade-in offer, they handle your existing loan’s payoff. The dealership communicates directly with your lender to settle the outstanding balance, streamlining the process as you don’t manage the payoff before the trade.

If you have positive equity, the surplus applies as a credit towards the new vehicle’s price, acting as a down payment and reducing the new loan’s principal. If you have negative equity, the dealership may roll the outstanding balance into your new car loan. This adds the deficit from your old loan to the total financed, increasing its principal and potentially its term or monthly payments. Alternatively, pay the negative equity out of pocket.

For a smooth trade-in, gather documents before visiting the dealership: driver’s license, vehicle registration, proof of insurance, and the vehicle’s title if owned outright. If you have a loan, bring loan account information, including lender contact details and the payoff quote. Maintenance records can be helpful, demonstrating care and potentially supporting a higher trade-in value.

Important Considerations Before You Trade

Before finalizing a trade-in, especially with negative equity, consider the financial implications. Rolling negative equity into a new loan increases the total financed, leading to higher monthly payments and a longer term. This means paying interest on a debt from a vehicle you no longer own, potentially putting you “upside down” on your new loan.

Shop around and get trade-in offers from multiple dealerships. Different dealerships may value your trade-in differently based on inventory needs and sales goals. Comparing offers helps ensure the most favorable deal.

Review the terms of any new loan: interest rate, loan term, and total financed. Understand how trade-in value and any negative equity are incorporated into the new financing agreement. A higher interest rate or extended loan term can increase the new vehicle’s total cost over time.

If you have negative equity, consider alternatives to trading in immediately. One option is to continue payments until you build positive equity. Another is to sell the car privately, which can yield a higher price than a dealership trade-in, reducing negative equity. However, selling privately requires more effort, and you still need to pay off the remaining loan balance to transfer the title.