Looking to trade in your current set of wheels for something a little more modern? Buying a new car is always exciting, but multiple factors can affect your decision. One key issue is whether or not you still owe money on your vehicle.
So, can you trade in a car with a loan?
Trading in a car with an existing loan is possible, but it can be expensive depending on the outstanding amount. Before pursuing this option, it's vital to understand how trade-ins work, whether you have positive or negative equity in your car, and how your loan impacts your decision.
If you're in the market to trade in your financed vehicle, keep reading as we address everything you need to know about the process. We'll cover what a trade-in entails, how to do it, when you shouldn't do it, and more.
How Does A Trade-In Work With A Loan?
There are multiple reasons you might want to trade in your car. Perhaps you need an upgrade for a growing family. Maybe you're earning more and want to treat yourself to something sleek. You might even be facing financial turmoil and want to downgrade in order to get the boot of your auto loan company off your neck. Whatever the reason, there are a few crucial things you should know about how a trade-in works.
Typically, when you trade in a car, the dealership will deduct the vehicle's value from the price of the new car. However, when trading in a car that you haven't paid off yet, the dealer will take over the loan and pay it off on your behalf. They'll also handle all of the paperwork, including the transfer of the car's title, which establishes legal ownership.
If the value of the vehicle you're trading in is higher than the amount you still owe on loan, you have positive equity in your vehicle. This value can help reduce the cost of the car you're planning to purchase.
For example, let's say your trade-in is worth $7,000, but you still owe $3,000 on it. If you're buying a vehicle for $10,000, the dealer will pay off the loan and apply the remaining $4,000 you have in equity to the cost of the new car, effectively bringing down the total owed to $6,000.
However, if your outstanding loan amount is more than what your trade-in is worth, you have negative equity. The dealer will still pay off the loan but will require you to settle the difference in cash. Alternatively, you may come to an agreement to roll the balance owed into a new auto loan.
For example, let's say the trade-in value of your vehicle is $7,000, and you still owe $8,000. You'll need to pay the $1,000 difference in cash or allow the car dealership to add the amount to your new car loan.
The trade-in value of a vehicle is affected by several factors, including its make, model, age, color, mileage, mechanical upkeep, interior and exterior condition, popularity, local market conditions, and recondition costs. You can get an estimated trade-in value range using sites like Kelley Blue Book, Edmunds, and NADAguides.
How To Trade In A Car With A Loan
Although most of the legwork will be done by your dealer, you'll need to perform your own due diligence to ensure you don't get swindled out of your trade-in's true value. With that said, here's how the typical trade-in process works.
1. Find A New Car That Suits Your Budget.
Before you do anything, determine what you can afford on a new loan and then look for a vehicle within your price range. When calculating your budget, consider how much equity you have in your current vehicle, what your new monthly auto loan repayment amount will be, and the interest on your new loan. Ideally, you'll want to avoid a situation where you have negative equity rolling into a new loan since this will only dig you further into debt.
2. Prepare Your Trade-In Vehicle.
While you shouldn't do any major repairs on your trade-in, you should at least check the brake and transmission fluids, oil, radiator, windshield washer, and headlamps. You should also fix any scratches, wash and wax the car, and clean the interior. Taking care of these minor things not only makes your car more presentable but also helps maintain or increase the trade-in value.
Major repairs should be left alone since you might not make back what you spend when you trade-in your car. In addition, dealerships tend to have the tools and expertise to fix bigger problems at a lower cost than you're likely to spend out of pocket.
3. Research Your Trade-In's Value.
Figuring out what the fair market value of your vehicle is before approaching a dealership does four things:
- It helps you understand how much positive or negative equity you potentially have in the car
- It allows you to make well-informed decisions about whether to proceed with the trade-in (especially in a case where you have negative equity)
- It gives you a better sense of what a dealership might offer you
- It helps you gain some negotiating power
If your equity is negative, consider postponing your trade-in until you pay down your existing loan. Although you can roll the amount into a new loan, trading in a car that's worth less than what you owe can be extremely costly in the long run.
However, if you have positive equity, you'll be in a better position to bargain with your dealer. You're also less likely to get exploited if you know what your car is worth upfront.
4. Get Your Paperwork In Order.
When trading in a vehicle with a loan still attached, you'll need to provide the following information or items:
- Loan details, including your account number and how much you still owe
- Vehicle registration
- Driver's license
- Proof of insurance
- A printout of the vehicle's trade-in value
- All car keys and remotes
You'll also want to provide any proof of recent maintenance and repairs.
5. Compare Trade-In Offers.
You want to get the best deal possible, so get in touch with several dealers before making your choice. Sift out the dealers trying to low-ball you on the price. If you want to go with a particular dealer who's provided a trade-in quote that's too low, use your trade-in estimate to negotiate a better price.
Whatever you do, keep negotiations for your trade-in separate from the new car you want to purchase. Dealers may try to mark up your new vehicle's price to counter a high trade-in value.
6. Decide On A Dealer And Close The Deal.
When you have a good trade-in deal that you find acceptable and you've settled on a price for your new car, it's time to conclude the agreement. Carefully read through the sales contract to ensure everything is in order.
You'll want to pay particular attention to the current loan amount, the monthly repayment, the interest rate, the loan period, and anything else you discussed during the negotiating process. If you're trading in your car with negative equity, make sure your contract explains how it will be handled. When you're happy with the terms and conditions, you can go ahead and sign the agreement.
What happens if you buy a car and don't enjoy driving it as much as you thought you would? What if you find something better months or even weeks later?
Can You Trade In A Car You Just Bought?
Quick-fire answer: yes.
However, it might not be the best idea.
Buyer's remorse is a super-strong emotion—one that can prompt drastic action. But while you can trade in a financed vehicle at any time, it's crucial to understand that cars start depreciating in value the moment you drive them off the lot. In fact, vehicles lose anywhere between 15% and 20% of their value within the first year.
Depending on your loan setup (i.e., your down payment amount, interest rate, cancellation penalty, etc.), you might have negative equity in the car almost immediately. This is usually because the loan agreement exceeds the car's market value. In this case, it's often best to wait until you can sell the vehicle for the same amount as your loan settlement.
If the opposite is true and you have positive equity in the car, you can pretty much trade it in whenever you want without severe financial implications.
The trade-in process seems simple enough, but it can get complicated—especially if you owe more on your auto loan than the car is worth. For this reason alone, it's crucial to do your research on your existing loan agreement and your vehicle's trade-in value.
If you're desperate to get rid of your current vehicle to buy a new one, consider whether you can get a better price selling privately. Dealers want to make as much money on your vehicle as they can, which is why you're likely to make more through a private sale instead. However, if you have positive equity in your car and the dealership is offering great incentives, then you should be in good shape to get a fantastic deal.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.