It is entirely possible to trade in a car that is not yet paid off. However, trading in a car with a loan can be tricky. You may want to consider taking extra steps to ensure that a trade-in is right for you. These extra steps should include considering your car's current equity, whether that equity is positive or negative, and how that equity would affect the outcome of a trade-in. If your equity is positive, you may be in a good position to trade in your vehicle even though it is not yet paid off. Negative equity, however, may be more costly than you might expect or are willing to pay. Below, we discuss how to trade in a car that is not paid off and when this option is most beneficial for drivers.
What does it mean to trade in a vehicle?
Trading in a vehicle means transferring the vehicle to a dealership that can take over the benefits and responsibilities associated with that vehicle. Typically, a trade-in is beneficial for drivers who are hoping to receive credit toward a new vehicle they would like to buy or lease. To determine the amount of that credit, the dealership considers the value of the car, factoring in things like the vehicle's overall condition, consumer demand for your vehicle's make and model, and any prior negotiations and agreements you have come to with the dealership. One important factor for determining the value of your trade-in is the vehicle's depreciation, the value of your vehicle in its current state as subtracted from the price of the vehicle brand new.
Can you trade in a car that has a loan?
A common question we encounter is "will a dealership buy my car if I still owe?" It is definitely possible to trade in even if you are still paying your auto loan for that vehicle. However, trading in a car you still owe on might be slightly more challenging and may end up being costly if you are not careful.
The first step in determining whether a loan trade-in is right for you involves calculating the equity you have built up in the vehicle. The term equity refers to the difference between your car’s current value and the remaining amount you owe on your auto loan. This difference can either result in your having positive or negative equity, which can significantly impact the benefits of a trade-in.
Trading in a car with positive equity
If your car, in its current state, is worth more than what you still owe on your auto loan, you have positive equity. Positive equity typically translates into credit that you can then put toward a new car. To further boost your savings on a new vehicle, you can negotiate the price of the new vehicle that you are interested in. However, after applying your positive equity to a new vehicle, you may have to cover the remaining costs of the vehicle by providing further financing, like cash or another loan.
Trading in a car with negative equity
On the other hand, if your car's value is actually worth less than the amount you still owe on your loan, you have negative equity. This is also referred to as being upside-down or underwater on your car loan and makes it less beneficial to trade in your car. Trading in a car that has negative equity means that you will have no credit from your traded vehicle to apply to your new purchase amount, and as described above, will still have to pay off your former creditor with cash, rolling the amount into your new loan, or making other arrangements.
Alternatives to a car trade-in
In some instances, trading in a car with a loan makes the most sense financially. However, it may not be right for you. Fortunately, you have other options available for selling your car, even if you still owe toward your auto loan.
One option is to sell your car to a private buyer. This may translate into getting more money out of your vehicle than you would if you were to trade in. You may even be able to offset any negative equity you have in your loan if you set the price high enough. If this option sounds right for you, make sure to let your lender know prior to selling your vehicle to avoid any unforeseen negative consequences.
An alternative to trading in on an upside-down car loan is to postpone the trade-in until your loan is paid off, or until you have positive equity. If you have the time and financial ability to postpone trading in your vehicle, it is a good idea to do so to avoid taking on more financial debt.
How soon can you trade in a financed car?
While you can trade in a financed car at any time, it is most beneficial to wait until you have positive equity before doing so. It is also a good idea to wait at least a year or more before trading in, especially if you purchased your car brand new. Since vehicles depreciate over time, and most quickly within their first year, a new car's value typically decreases very quickly.
In a nutshell, this means that you may have negative equity in the vehicle almost immediately. Of course, this can turn into positive equity over time, but it is a good idea to wait until you are sure you have positive equity before trading in. If you have negative equity, try to postpone your trade-in if possible, for you financially.