How to Trade In a Financed Vehicle (4 Things You Need to Know!) – Updating

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How to trade a financed vehicle

July 18, 2018 Financing & Leasing

It is very common for drivers to trade in their financed vehicles in Canada. In fact, most dealers, including Birchwood Credit Solutions, have no problem trading in a vehicle that hasn’t been paid off. But it’s important to understand how the trade-in process works before considering it as an option.

When it comes to trading vehicles, there is often a misunderstanding: “As soon as I have exchanged my vehicle, the loan expires, even if I have not yet paid it off in full.” This is incorrect and the remaining amount must always be paid out. But there are other factors to trade-ins as well.

In this post, we look at trade-in for financed vehicles and if it’s the right decision for you. Here’s what we’re going to discuss:

buy here pay here dealer

This is how the trade-in of a financed vehicle works

If you’re in the market for a new (or new) vehicle, trade-in is a great option that most dealerships offer. If you’ve paid off your loan in full, you’ll have no problem getting a new vehicle. However, if you’re still making payments on your loan, there are a few more things to consider.

First, your credit doesn’t disappear when you trade in your vehicle—regardless of how much money you owe. Instead, the balance of your loan will be transferred to your new vehicle.

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If the amount you owe for the car is less than the trade-in value, the process is fairly simple. Let’s say you owe $5,000 on a car and a dealership offers you a $6,000 trade-in for it. The dealer will repay the $5,000 loan for you, releasing the lien. Then you transfer ownership of the car to the dealer.

If the amount you owe on the loan is more than the dealer is offering in trade-in value, things get a little more complicated. Lenders often refer to this as a “reverse” car loan. This sometimes happens when people buy a new vehicle with no down payment.

Check out our blog post No money for car loans 101 Learn more about the benefits of a deposit.

In this case, your old loan usually becomes part of your new loan. This is called “rollover” and ultimately means you’re still paying for a vehicle you no longer own. Let’s say you owe $10,000 on a car and the dealership offers a $6,000 trade-in. The dealer takes the remaining $4,000 and “rolls it over” into the loan for your new car.

When it pays to trade in a financed vehicle

At Birchwood Credit Solutions, we encourage our customers to find their freedom by driving the vehicle that fits their lifestyle. If that means trading in a financed vehicle, then we’re here to help you along the way. Here are our top reasons why a trade-in might be a good fit for you:

  • In addition to your loan payments, your current vehicle is costing you extra money that you haven’t accounted for. This often happens when your vehicle is a gas guzzler, needs special parts or extra maintenance. If you find you can’t keep up with the extra cost, consider trading it in for a smaller vehicle or a less-frills model.
  • If the retailer offers additional incentives. Towards the end of the year – from October to December – dealers try to make room for the new year’s models. You might find a great deal that’s worth the trade-in.
  • When you’ve done your research. We always encourage our customers to do their own research on the type of vehicle they are looking for before coming to the dealership. This will ensure you can afford the new payments and are happy with your new loan.
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When to wait to trade in a financed vehicle

As nice as it is to drive a new vehicle, there are times when trading your financed vehicle could hurt you in the long run. Here are some times to consider waiting:

  • If your current loan is relatively new. Once you drive your vehicle out of the parking lot, it loses value. Instead of buying a new wheelset right away, wait until the cost of it has evened itself out and your losses aren’t that great.
  • If you are threatened with a prepayment penalty. Lenders collect interest from you when you apply for a loan. If you pay it off early, you take away part of its income, which often results in you having to pay a prepayment penalty.
  • When you have paid off your loan and can make extra money by selling your vehicle privately. Sometimes earning some pocket money is a better option than trading your vehicle. If you own the car and know you can sell it for a significant amount, go down this route instead.

What you need for a trade-in

Logistically, there are a few key things you need to be aware of in order to successfully trade in your vehicle.
These are our 3 most important things to make you feel ready when you step into our dealership:

  1. Please investigate — Remember that you are making a ‘deal’ so you should know as much as possible about your vehicle to ensure you get the best deal. The service department will check your vehicle before picking you up. So research as much as you can including make, model, condition, repairs, equity you owe, etc.
  2. Understand your vehicle’s equity — Be prepared to discuss your current loan and the outstanding balance. If you have negative equity when you pay, you are expected to pay more with a higher interest rate. But as long as you understand how negative equity works, you will have no problem finding a trade-in that works for you.
  3. Read the contract — This is by far the most important piece of the puzzle. Make sure you know what you’re committing to before agreeing to the trade-in. There’s no harm in asking if you can take the contract home to read through in detail. If a dealership makes you an offer verbally, always request it in writing.
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We give you all the details on three ways to get cash for used cars and how to prepare your car for the final sale.

Check out the rest of our blog for more helpful articles on a variety of topics. Use Birchwood Credit Solutions’ auto loan calculator to calculate what you can potentially spend on a new car, truck or SUV and apply for a pre-approved auto loan online.

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Rebecca Lake

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