What Happens If I Want to Trade In My Financed Car?

Trading in a financed vehicle is common for individuals seeking a new car. Understanding the financial aspects and procedural steps helps navigate this transaction. This guide clarifies how to prepare for and execute a trade-in when a car loan is active.

Understanding Your Current Vehicle’s Financial Standing

Before engaging with a dealership, understand your current vehicle’s financial position by determining your outstanding loan balance and estimating its market value. Knowing these figures helps assess your equity.

To ascertain your current loan balance, you can contact your lender directly, review your online account portal, or check recent loan statements. Lenders can provide a precise payoff amount, which may include interest accrued up to a specific date, often referred to as a “10-day payoff.”

Estimate your vehicle’s trade-in value using reputable online valuation tools, such as Kelley Blue Book, Edmunds, and NADA Guides. These tools provide a preliminary estimate based on your car’s make, model, year, mileage, and condition. The actual offer from a dealership may vary after a physical appraisal.

With your estimated trade-in value and loan payoff amount, determine your vehicle’s equity. Equity is the difference between your car’s market value and the outstanding loan balance. If your car’s value is greater than what you owe, you have “positive equity.” For example, if your car is worth $18,000 and your loan balance is $15,000, you have $3,000 in positive equity. Conversely, “negative equity,” often called being “upside down” or “underwater,” occurs when your loan balance exceeds your car’s value. For instance, if your car is worth $12,000 but you owe $15,000, you have $3,000 in negative equity.

The Trade-In Process with a Financed Vehicle

When trading in your financed vehicle at a dealership, the dealer typically manages the process. The dealership facilitates the payoff of your existing loan and applies your vehicle’s trade-in value towards your new purchase.

The dealership will first appraise your current vehicle to determine its trade-in value. After an agreement on the trade-in amount, the dealer will obtain a payoff quote directly from your current lender.

The agreed-upon trade-in value is then applied to the purchase price of your new vehicle. If your trade-in value is sufficient to cover your outstanding loan balance, the surplus can be used to reduce the amount financed for your new car. The dealership will then pay off your old loan directly to your previous lender, ensuring the lien is released.

If the trade-in value does not fully cover your old loan, the remaining balance can often be incorporated into the financing for your new vehicle. It is important to obtain written confirmation from both the dealership and your original lender that the old loan has been fully paid off to avoid future complications.

To complete the trade-in, you will need to provide certain documents. These typically include your driver’s license, vehicle registration, and the loan account information for your current vehicle. While the dealership handles the title transfer once the loan is satisfied, having your vehicle’s title on hand is beneficial if you own the car outright or if the loan is near payoff.

Navigating Equity Scenarios

The equity position of your current vehicle significantly influences the financial outcomes of a trade-in. If you have positive equity, meaning your car’s trade-in value exceeds your loan balance, this surplus can be utilized in several ways.

You can apply the entire positive equity as a down payment on your new vehicle, which reduces the amount you need to finance and potentially lowers your monthly payments. Alternatively, depending on state laws and dealership policies, you might receive a portion or all of the positive equity as cash back.

Conversely, negative equity requires more careful consideration. One common approach is to “roll over” the negative equity into your new car loan. This means the outstanding balance from your old loan is added to the purchase price of your new vehicle, increasing the total amount financed. While convenient, this option leads to a larger new loan, potentially higher monthly payments, and a longer loan term, meaning you pay interest on a depreciating asset. Consumers should be aware that some dealers may advertise paying off your old loan, but actually incorporate the negative balance into the new financing.

Another way to address negative equity is to pay the difference out of pocket. This involves directly paying the dealership the amount by which your loan balance exceeds your trade-in value. This option prevents the negative equity from being added to your new loan, which can save you money on interest over time and result in a lower principal for your new vehicle.

As an alternative to trading in, selling your financed car privately might yield a higher price than a dealership trade-in offer. A private sale could help reduce or eliminate negative equity more effectively, as you are selling directly to a consumer rather than to a business that needs to profit from resale. However, a private sale typically demands more effort and time, including marketing the vehicle, communicating with potential buyers, and managing the transfer of ownership and loan payoff directly with your lender. In some jurisdictions, trading in a vehicle at a dealership can also offer a sales tax advantage, where you only pay sales tax on the difference between the new car’s price and your trade-in value.