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How To Trade in a Car With a Loan – Updating

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If you’re looking for a new set of wheels, you might want to get rid of your old car – even if you still owe money for it.

But trading a car on credit could cost you if you have negative equity, meaning you owe more on your credit than your car is worth. Let’s take a look at your potential options – whether you have positive or negative equity – and how to trade a car on a loan balance.

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Can I trade in my car if it is not paid off?

In general, you can trade your car in for a new one even if you’re still making payments for it. But first it helps to know how much equity you have in the vehicle. This is the difference between the current value of your car and the amount you owe on the loan. Depending on these two factors, you will either have positive or negative equity.

Positive equity

If your car is worth more than you owe, you have positive equity. As the name suggests, positive equity is a good thing. When you trade in your vehicle, the dealer can use your equity to purchase the new vehicle. This reduces the amount to be financed.

negative equity

If you owe more on the loan than your car is worth, you have negative equity — and you’re not alone.

Looking at April 2020 new car sales with vehicle trade-ins, according to Edmunds data, 44% were negative stock payments — with an average of $5,571 remaining on the loan. If your vehicle has negative equity and you want to trade it in, you need to decide which option is your best option.

  • Roll the negative equity into your new car loan. While this option may be convenient, it increases your new loan amount, which means you could pay more interest over the life of the loan. And going down that route usually means borrowing more than your new car is worth, putting you at greater risk of turning your head again.
  • Pay the difference between the trade-in value and your remaining balance. If you have cash on hand, you can pay the difference between what you owe on your current loan and what the dealer is offering you for your trade-in. This can help keep your new loan amount lower.
  • Delay the trade-in. You can also wait until you’ve traded in your car, until you’ve paid off your car loan, or — at least — you’re not upside down.

How quickly can you trade in a financed car?

You can trade in a financed car at any time, but you may want to wait a year or more – especially if you bought a new car. Cars lose value over time. A brand new car can depreciate by 20% or more within the first year of ownership, and then depreciate more slowly in subsequent years. Depending on the amount of down payment you made on your loan and how quickly your car has depreciated in value, you may find that you have negative equity on the vehicle almost immediately.

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How to swap a car for a loan?

It pays to get a good trade-in value – the higher the amount, the more you can potentially use towards your new car purchase. Here are some steps to take.

1. Research the value of your trade-in vehicle

Knowing the estimated fair market value of your car can help you get a feel for what a dealer might be offering at your trade-in and give you some bargaining power. Sites like Kelley Blue Book and Edmunds have tools that allow you to estimate your car’s trade-in value using information such as the year, make and model of your car, and the number of miles on the odometer.

To get a better sense of whether you have positive or negative equity, compare your car’s estimated resale value to your loan repayment amount. This includes your loan balance plus accrued interest and fees, so it may differ slightly from your loan balance. Contact your lender to find out your payout amount.

If you have positive equity, you can use the dealer’s trade-in offer to pay off your existing credit and use the leftover money as credit to buy a new car. However, if you have negative equity, you must decide whether to defer your trade-in, pay off your existing loan, or put your loan balance into the new car loan.

2. Compare and negotiate exchange offers

Check with some retailers for trade-in value estimates. If you think a dealer is offering a low price, you can use the car appraisals you researched to negotiate. Getting multiple estimates can help ensure you’re getting the best deal for your situation.

Keep the negotiations for the new car purchase and your trade-in separate. Some dealers may try to increase the price of the new car to compensate for a high trade-in amount. If you have negative equity and decide to roll over your current loan balance into your new loan, make sure you understand the total loan amount, the APR, the loan term, and your new monthly payment before agreeing to any deal.

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3. Close the deal

Once you’ve agreed on a value for your trade-in vehicle and the price of the new vehicle, it’s time to close the deal. Read the purchase agreement carefully – it should include your new loan amount, repayment term, interest rate, monthly payment and any other verbal promises made during the negotiations. It should also detail how negative equity will be handled. Some dealerships advertise that they’ll pay off your car loan — no matter what you owe it — and instead just put the negative equity into your new loan.

Alternative to trade-in

Trade-in your car at the dealership is not your only option. You can also sell your car to a private buyer, although you may need to tell your lender first. Although it may take longer, you are likely to get more money for your car selling privately than trading through a dealership, which could help offset negative equity.

Ask an expert about trading a car with an outstanding loan

Meet the Expert: Brian Moody, Editor-in-Chief of Autotrader and spokesman for Kelley Blue Book, has over 12 years of experience as an automotive journalist.

Is it a good idea to trade in a car when paying off a loan for the same vehicle?

“Basically no. It’s not a good idea to trade in a car if you still owe money on the loan you bought to buy that car. It’s possible, but the dealer will simply add the rest of the loan to the price of your new car. Make sure your loan allows for early repayment. If not, the merchant can pass this fee on to you.”

What should consumers consider when swapping a car with residual credit?

“Your new loan will simply factor the unpaid portion of your old loan into the total price of the car. That means you pay more for the car and for the financing.”

Do you have bargaining power when swapping cars with credit?

“Perhaps. If you have a very popular and desirable model, that might help. Even if you owe very little on the old car, you still have some bargaining power. Remember, there is no such thing as free money. The dealership is in Business to make money selling things, not to get you out of a car you previously overpaid for.”


What’s next?

Understanding the estimated value of your car and how much you owe on it are important first steps when trading a car on credit. Trading a car with negative equity could become expensive in the long run.

If you can’t afford to finance the car you want because you need to add negative equity, consider trading in your current car for a cheaper one. While you’ll still have to carry over the negative equity from your current car loan, your total loan amount will be less — and you may pay less total interest on the loan.


About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma, Reviewed.com, US News & World Report, among others. Her favorite topics include maximizing credit card rewards and budgeting. W… Read More

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