Can You Trade In a Financed Car?

It is possible to trade in a vehicle even if you still have an outstanding loan on it. This process involves the dealership handling the payoff of your existing car loan as part of the transaction for a new vehicle.

Trading In a Financed Vehicle

When you decide to trade in your financed vehicle, the dealership typically takes on the responsibility of paying off your existing loan. This payoff amount is integrated into the financial agreement for your new car purchase.

The trade-in value of your current vehicle is applied as a credit toward this existing loan. If the trade-in value exceeds the loan balance, the surplus can be used towards the new vehicle. Conversely, if the loan balance is higher than the trade-in value, that difference will need to be addressed.

Assessing Your Current Vehicle’s Financial Position

Before visiting a dealership, it is important to understand your current car’s financial standing. Obtain the exact payoff amount for your car loan from your lender. This amount is different from your current balance, as it includes any interest accrued since your last payment, along with potential fees or penalties. You can usually get this “10-day payoff” amount by contacting your bank directly or by checking your online loan account.

Next, estimate your car’s trade-in value. Online valuation tools like Kelley Blue Book (KBB), Edmunds, and NADAguides provide estimates based on factors such as make, model, year, mileage, and condition. It is important to note that a dealership trade-in value is typically lower than what you might receive from a private party sale, as dealerships need to account for reconditioning and profit.

Understanding your vehicle’s equity position is crucial. “Positive equity” occurs when your car’s estimated trade-in value is greater than your loan payoff amount. Conversely, “negative equity” means you owe more on your loan than your car is worth. If you owe $10,000 but your car is valued at $7,000, you have $3,000 in negative equity, a situation sometimes referred to as being “upside down” on your loan.

Navigating the Trade-In Process

Once you have assessed your vehicle’s financial position, the next step involves the actual trade-in at a dealership. When you bring your car to the dealership, they will conduct an appraisal to determine its market value and make a trade-in offer. It is beneficial to have researched your vehicle’s value beforehand to inform your negotiations.

The dealership then handles the payoff of your existing loan directly with your lender. The amount of your trade-in offer is applied to settle your old loan.

You will need to provide certain documents for the trade-in to proceed smoothly. This typically includes your driver’s license, vehicle registration, and your loan account number. If you have the car’s title, you should bring that as well; if not, the dealership will manage the title transfer once the loan is paid off.

The agreed-upon trade-in value, after the existing loan is satisfied, is then applied towards the purchase price or down payment of your new vehicle. You will sign new loan documents for your new car, which will incorporate the outcome of the trade-in. It is important to ensure you receive written confirmation from both the dealership and your former lender that the old loan has been paid in full.

Evaluating the Financial Implications

The financial outcome of trading in a financed car largely depends on whether you have positive or negative equity. If you have positive equity, the surplus value from your trade-in acts like a down payment on your new vehicle. This can reduce the amount you need to finance, potentially leading to lower monthly payments or a shorter loan term for your new car.

However, if you have negative equity, the outstanding balance from your old loan is typically “rolled over” or added to your new car loan. This increases the total amount you finance for the new vehicle, which can result in higher monthly payments and a longer loan term. Rolling negative equity can also place you “upside down” on your new car from the beginning, meaning you owe more than the new car is worth as soon as you drive it off the lot.

Financing negative equity can increase the risk of financial strain. To mitigate the effects of negative equity, you might consider paying the difference in cash, if feasible. Alternatively, some buyers choose to trade down to a less expensive vehicle to minimize the impact of rolling over the negative balance.