Can You Trade a Car in if You Are Behind on Payments?

It is possible to trade in a car even when behind on payments, but the process involves understanding your current financial situation and the implications of such a transaction.

Understanding Your Current Car Loan Status

Before considering a trade-in, accurately assessing your financial position regarding your current car loan is important. Being behind on payments means you have missed scheduled installments, which can lead to late fees and, eventually, a default on your loan. Lenders typically impose late fees once a payment passes a grace period, often around 10 to 15 days after the due date. If a payment becomes 30 days past due, lenders may report it to credit bureaus, negatively impacting your credit score.

To understand your loan status, you need to find your exact loan payoff amount. This is the total sum required to fully satisfy your loan on a specific date, including the principal balance, accrued interest, and any fees. This amount is often different from your remaining balance, which may not include all charges. You can typically obtain a payoff quote by contacting your lender directly, checking their online portal, or reviewing your most recent account statement.

Next, determine the current market value of your car. Online valuation tools like Kelley Blue Book (KBB), Edmunds, and the National Automobile Dealers Association (NADA) Guides can provide estimates. These tools consider factors such as the vehicle’s make, model, year, mileage, condition, and features. It is helpful to check multiple sources as values can vary, and trade-in values are generally lower than private party sale values.

With these figures, you can calculate your equity. Positive equity means your car’s market value exceeds your loan payoff amount. Conversely, negative equity, also known as being “upside down” or “underwater,” occurs when you owe more on the car than its current market value. For example, if you owe $20,000 but your car is worth $15,000, you have $5,000 in negative equity.

Navigating a Trade-In with an Outstanding Loan

Trading in a vehicle with an outstanding loan is generally possible, even if you have negative equity, but it involves specific considerations at the dealership. When you trade in a financed car, the dealership typically handles the existing loan by obtaining the payoff amount from your lender. The trade-in value of your current vehicle is then applied as a credit toward the purchase of the new car.

If your car has positive equity, the dealership will pay off your existing loan, and the remaining equity will be applied to reduce the cost of your new vehicle. However, if you have negative equity, you will need to address the difference between your trade-in value and your loan payoff amount. One common way to manage negative equity is to “roll” it into the new car loan. This means the negative amount is added to the principal balance of your new loan, increasing the total amount financed and, consequently, your monthly payments. While convenient, this option can lead to being immediately underwater on your new vehicle.

Another approach to handling negative equity during a trade-in is to pay the difference upfront with cash. This directly satisfies the outstanding balance on your old loan, preventing it from being added to your new financing. The dealership will facilitate the paperwork for paying off the old loan and establishing the new one, including title transfers.

Other Options for a Car with an Outstanding Loan

Beyond trading in, several other options exist for managing a car with an outstanding loan, particularly when facing payment difficulties. Selling the car privately can often yield a higher price than a dealership trade-in, potentially reducing or eliminating negative equity. If you sell privately, you must work with your lender to manage the lien on the title. The loan needs to be satisfied before the title can be transferred to the new owner. This may involve the buyer paying the lender directly, or you paying off the loan and then receiving the title to transfer.

Refinancing your current car loan is another possibility. This involves obtaining a new loan, often with a lower interest rate or a longer repayment term, to pay off your existing loan. A lower interest rate or extended term can reduce your monthly payments, making them more manageable and helping you catch up if you are behind. Eligibility for refinancing depends on factors like your credit score, loan-to-value ratio, and the car’s age and mileage. Lenders prefer applicants who are current on payments.

Communicating with your current lender is important when you are behind on payments. Lenders may offer various solutions to help you avoid default or repossession. Potential options from your lender could include a payment deferment, which allows you to skip a payment and add it to the end of the loan, or a temporary payment plan adjustment. Some lenders may also be willing to change your payment due date to better align with your income schedule. Being proactive and contacting your lender early can provide more choices.

Impact on Your Financial Standing

Any decision regarding a car loan when behind on payments carries consequences for your financial standing. Late payments, especially those reported to credit bureaus after 30 days, can significantly lower your credit score. Payment history is a major factor in credit scoring models, and a single reported late payment can remain on your credit report for up to seven years. A reduced credit score can make it harder to obtain new loans or credit at favorable interest rates in the future.

Rolling negative equity into a new car loan increases your overall debt burden. This can lead to higher monthly payments and a higher debt-to-income ratio, which is a measure lenders use to assess your ability to manage monthly payments. A higher debt-to-income ratio can make it harder to qualify for other forms of credit, such as a mortgage or personal loan. This also means you are paying interest on a larger amount, including the negative equity from your previous vehicle.

Successfully selling your car privately or refinancing your loan to more manageable terms can mitigate some negative credit impacts. If you sell privately and pay off the loan in full, you avoid further late payments and potential default. Refinancing, particularly if it results in a lower interest rate and allows you to make consistent, on-time payments, can help rebuild your credit score over time. However, any new loan application, including for refinancing, involves a hard credit inquiry, which can temporarily affect your score.