Can I Trade In a Car That I Still Owe Money On?

It is generally possible to trade in a car even if there is still an outstanding loan balance. Dealerships frequently facilitate such transactions. The process involves understanding your current vehicle’s value versus its loan amount, which determines how the trade-in impacts your next vehicle purchase.

Preparing for the Trade-In

Before engaging with a dealership, gather specific financial information about your current vehicle.

Determining Your Current Loan Payoff

Contact your current lender to obtain an exact payoff amount for your auto loan. The balance on a monthly statement might not reflect the true payoff because interest accrues daily. Lenders typically provide a “10-day payoff” quote, which includes the principal, accrued interest, and any fees, valid for a specified period, usually 10 to 20 days.

Estimating Your Car’s Trade-In Value

Utilize reputable online valuation tools such as Kelley Blue Book (KBB) or Edmunds to estimate your car’s trade-in value. These platforms consider factors like your vehicle’s make, model, year, mileage, condition, and trim level. Obtaining multiple estimates from different sources provides a comprehensive understanding of your car’s potential worth.

Pre-Dealership Research and Offers

After determining your loan payoff and estimated trade-in value, research trade-in offers from various dealerships or third-party buyers. Submit your vehicle’s details to multiple dealerships to receive preliminary offers. Comparing these offers helps you gauge a fair market price for your vehicle before committing to a new purchase and strengthens your negotiation position.

The Trade-In Process at the Dealership

When you arrive at the dealership, the process involves several steps. The dealership typically handles settling your existing loan and applying your trade-in value.

The dealership will appraise your vehicle to determine its actual cash value. If you accept their offer, the dealership will manage the payoff of your existing auto loan. They will contact your lender directly to confirm the exact payoff amount and send the funds to clear your old loan.

The agreed-upon trade-in value is then applied towards the purchase price of your new vehicle. If your trade-in value exceeds the payoff amount of your old loan, the surplus can reduce the cost of your new car. Conversely, if your trade-in value is less than your outstanding loan, this difference, known as negative equity, will need to be addressed.

The dealership also handles the necessary paperwork for transferring ownership. This includes signing documents to transfer your old vehicle’s title to the dealership once the lien is removed. You will also complete paperwork for your new vehicle, including its title and registration. Obtain written confirmation from both the dealership and your former lender that your old loan has been fully paid.

Navigating Positive and Negative Equity

The financial outcome of a trade-in depends on the relationship between your car’s market value and your outstanding loan balance. This comparison results in either positive or negative equity, each with distinct financial implications.

Understanding Positive Equity

Positive equity occurs when your car’s current market value exceeds the amount you still owe on its loan. For example, if your car is valued at $20,000 and your loan balance is $15,000, you have $5,000 in positive equity. This surplus can be applied as a down payment, which reduces the amount you need to finance for your new car and potentially lowers your monthly payments.

Understanding Negative Equity

Negative equity, also known as being “upside down” or “underwater,” arises when the amount you owe on your car loan is greater than its trade-in value. This situation is common, especially if a car depreciates quickly, a large portion of the vehicle’s cost was financed, or the loan term was lengthy. For instance, if you owe $18,000 but your car is only worth $15,000, you have $3,000 in negative equity.

One common way dealerships handle negative equity is by “rolling over” the deficit into your new car loan. This adds the outstanding balance from your old loan to the principal of your new car loan, increasing the total amount financed and typically resulting in higher monthly payments. While convenient, this option can lead to being upside down on your new vehicle from the start, making it harder to build equity. Alternatively, you can pay the negative equity out-of-pocket. This involves paying the difference between your loan balance and the trade-in value directly to the dealership, preventing the negative amount from being added to your new loan.