Can I Trade In My Car If I’m Behind on Payments?
Behind on car payments and considering a trade-in? Learn the possibilities, financial considerations, and alternative paths to navigate your situation.
Being behind on car payments is a common financial challenge, often leading to questions about options like trading in the vehicle. Understanding the process for trading in a car with missed payments is the first step toward exploring solutions. This article clarifies the practicalities of trading in a car with missed payments, explores negative equity, and presents alternative strategies for managing a car loan that has fallen behind.
Trading In a Car with Missed Payments
Trading in a car when payments are behind is possible, though it involves specific considerations. Dealerships are accustomed to handling trade-ins where an outstanding loan exists on the vehicle. When you trade in a financed vehicle, the dealership contacts your current lender to obtain the payoff amount, which includes the remaining loan balance, accrued interest, and late fees.
The dealership will then pay off your original loan in full, using the agreed-upon trade-in value as a credit toward this payoff. If your car’s trade-in value is less than the amount needed to pay off the existing loan, the remaining balance from the old loan does not disappear. Instead, this outstanding amount is rolled into the new car loan, increasing the principal of your new financing. This means the new loan’s balance will include the cost of the new vehicle plus the deficit from your previous loan.
Provide the dealership with your loan account number, current loan balance, and your car’s title or registration to facilitate this process. While the dealership handles the paperwork for transferring the title and settling the old loan, get written confirmation from both the dealer and your former lender that the old loan has been fully paid off. This ensures there are no lingering obligations on the previous loan. Dealerships have 10 days to satisfy the lien on a trade-in before selling it to another customer.
Understanding Negative Equity in a Trade
Negative equity often complicates trading in a car with an outstanding loan, particularly when payments are behind. Negative equity occurs when the amount owed on a vehicle loan is greater than the car’s current market value. This situation is referred to as being “upside down” or “underwater” on a car loan.
Missed payments contribute to negative equity by increasing the outstanding loan balance through additional interest accrual and late fees. Rapid vehicle depreciation also plays a role; a new car can lose up to 20% of its value in its first year. This depreciation can cause the car’s value to drop faster than the loan balance decreases, especially with low down payments or extended loan terms, such as six or seven years.
Calculate negative equity by subtracting the car’s current trade-in value from your outstanding loan balance. For example, if you owe $20,000 but the car is only worth $15,000, you have $5,000 in negative equity. This deficit must be addressed during a trade-in.
Negative equity can be rolled into the new car loan. This increases the new loan amount, leading to higher monthly payments and a greater total interest paid over the life of the new loan. Alternatively, if you have the funds, you can pay the negative equity amount out of pocket to avoid increasing your new loan. A high amount of negative equity can make securing a new loan more challenging, as it increases the loan-to-value ratio, meaning you would owe more than the new car is worth from the start.
Exploring Alternative Options
If trading in a car with delinquent payments is not feasible, other options exist to manage the situation. Communicate directly with your current lender. Lenders often offer programs for borrowers experiencing financial difficulties, such as payment deferrals or loan modifications. These adjustments might include temporarily reducing payment amounts or extending the loan term to lower monthly obligations.
Selling the car privately can yield a higher price than a dealership trade-in. Selling a vehicle with an existing lien requires coordination, as the lienholder has a legal claim until the loan is paid off. You must pay off the remainder of your loan, using the sale proceeds, before the lien can be released and the title transferred to the buyer. Sometimes, the buyer can pay the lender directly to satisfy the lien.
Refinancing the loan is possible, though being behind on payments can make this challenging. Lenders require the loan to be current before considering refinancing. If eligible, refinancing could lead to a lower interest rate or a longer loan term, thereby reducing monthly payments. While some lenders may offer a grace period for the first payment on a new refinanced loan, interest still accrues during this time.
As a last resort, voluntary repossession is an option. This involves returning the vehicle to the lender due to an inability to make payments. While it avoids the immediate stress of an involuntary repossession, it still negatively impacts your credit score and remains on your credit report for up to seven years. You may also remain responsible for any deficiency balance if the sale of the repossessed vehicle does not cover the full outstanding loan amount.