Can I Trade In My Car With a Loan On It?
Understand the financial considerations and practical steps involved in trading a car while still making payments. Make an informed decision.
Trading in a car with an outstanding loan is a common practice at dealerships. Understanding the financial aspects helps navigate the process effectively.
Understanding Your Current Car’s Value
Before approaching a dealership, determine two key financial figures for your current vehicle. First, determine your loan payoff amount. This is the total sum required to close your loan, which may differ from your remaining balance due to accrued interest. Contact your lender directly by phone, online portal, or by requesting a formal payoff letter to obtain this amount.
The second crucial figure is the estimated market value of your car, specifically its trade-in value. Reliable online tools such as Kelley Blue Book (KBB), Edmunds, and NADAguides can provide estimates based on your car’s year, make, model, mileage, and overall condition. When using these tools, be honest about any wear and tear or features to ensure the most accurate appraisal. While a private sale might yield a higher price, a trade-in offers convenience by streamlining the transaction at the dealership.
Calculating Your Equity
Once you have both your car’s estimated market value and its loan payoff amount, you can calculate your equity. Equity is the financial difference between what your car is worth and what you still owe on its loan. This calculation reveals your financial standing regarding the vehicle.
If your car’s estimated market value is greater than your loan payoff amount, you have positive equity. For example, if your car is valued at $15,000 and your payoff amount is $12,000, you have $3,000 in positive equity. This positive amount can be applied towards the purchase of your next vehicle, effectively reducing the amount you need to finance.
Conversely, if your loan payoff amount exceeds your car’s estimated market value, you have negative equity, often referred to as being “upside down” or “underwater.” If your car is valued at $15,000 but your payoff is $18,000, you have $3,000 in negative equity. This outstanding balance will need to be addressed during the trade-in process, typically by being rolled into the new car loan.
The Trade-In Process at the Dealership
When you visit a dealership, they will appraise your vehicle to determine its trade-in value. This value may differ from online estimates. Once a trade-in value is agreed upon, the dealership typically handles settling your old loan directly with your previous lender.
If you have positive equity, the dealership will apply that amount towards the purchase of your new vehicle. This reduces the overall amount you need to finance for the new car or can serve as a down payment. For instance, if your positive equity is $3,000, that amount directly lowers the price of the new car before financing is arranged.
If you have negative equity, the dealership will incorporate this outstanding balance into your new car loan. For example, if you have $3,000 in negative equity, that amount will be added to the price of the new vehicle you are financing. This increases the principal amount of your new loan, which can lead to higher monthly payments or a longer loan term. It also means you may owe more on your new car than it is initially worth.
The final loan amount, interest rate, and monthly payments are determined by the new car’s price, any additional down payment, and the equity from your trade-in. The dealership manages title transfers and ensures the lien on your old vehicle is released, simplifying the administrative burden.