How to Trade in a Car with an Outstanding Loan

How to Trade in a Car with an Outstanding Loan

November 10, 2023

There are various reasons for trading in a vehicle, such as seeking a more affordable monthly payment or upgrading to a vehicle that aligns better with your needs and preferences. 

It's common to seek financing for a different vehicle while you still owe money on your current one. Trading in your vehicle, whether or not you still have an outstanding car loan, is a relatively straightforward process. 

Read on to find out what to do if you're currently in the market to exchange your used vehicle for something newer.


Steps to trade in your car with an outstanding loan:


1. Get clarity on your outstanding loan balance

Calculating the exact amount that’s outstanding on your loan balance isn't always straightforward. It involves more than simply adding up your remaining monthly payments, as you might encounter early repayment fees or complex interest calculations.

The most precise way to determine your current loan balance is by reaching out to your lender and requesting a payout figure. While having this information is beneficial when you're getting ready to shop for a new car, it's not a strict requirement, as the dealership can assist you in obtaining this data as well.


2. Check if you have positive or negative equity

When you trade in your car, the dealer considers how much your car is worth and how much money you still owe on your car loan. The difference between these two amounts is called equity. It can be good (positive) or not-so-good (negative).

  • Positive equity

Positive equity is when your car is worth more than what you still owe on your car loan. This is good because the extra money can go toward your new car. For example, if your car is worth $20,000, and you still owe $15,000 on the loan, you have $5,000 in positive equity to help buy your new car.

  • Negative equity

Negative equity happens when you owe more money on your car than it's worth. For instance, if you still have $10,000 left on your loan, but your car is only worth $8,000, you're dealing with $2,000 in negative equity. Some dealers might say they accept cars with negative equity, but be careful. They often add that negative equity to your new loan, making you owe more money and pay more interest.


3. Keep your documents ready

When you're ready to trade in your car, the dealership will need some important documents from you. Here's what you'll typically need:

  • Your driver's license.

  • Proof of your income and where you live.

  • The title for your vehicle.

  • Information about your loan, including the payoff amount and account details.

  • Don't forget to bring your vehicle's keys.

  • Proof of insurance for your car.


4. Determine your car's trade-in value

You can use online tools like Kelley Blue Book (KBB) or Edmunds to find out how much your car is worth. Understanding your car's value is essential for negotiating a fair deal and planning your new car purchase within your budget. It also helps you figure out if you have positive or negative equity. Just subtract the remaining loan amount from the average trade-in value to see if you owe more than your car's worth.


5. Compare offers

After determining your car's value, you can start visiting different dealerships and online platforms to get trade-in quotes. Keep in mind that you aren't obligated to trade in your car at the same dealership where you're buying your new one. 

Ideally, you want to trade in your car for more than what's left on your loan. This will give you extra money to put towards your next vehicle. If that's not the case, try to negotiate as close to the remaining loan amount as possible to minimize your financial loss.


6. Review the contract

Be cautious when dealing with dealerships that promise to clear all the negative equity on your old car. It's important to remember that the value of your vehicle and the loan amount are separate factors. Any negative equity will likely be added to your new loan, resulting in higher payments.

If a dealer presents you with an offer verbally, make sure it's documented in the contract. Don't hesitate to ask the dealership any questions you may have about the loan agreement, and don't feel obligated to trade with them if you believe the offered value isn't fair.


Why trading in a car with negative equity is not advisable?

If you're considering getting a new car but find yourself in a situation with negative equity on your current loan, it's best to delay the trade-in. Rolling over the old loan into a new one can pose risks to your finances.

While some dealerships may encourage you to carry over your negative equity into the new car, this approach often results in higher interest rates and increased loan amounts. 

In simple terms, by trading in with negative equity, you'll end up paying off both the remaining loan balance on your old car and the value of the new one. This means you'll continue making payments for a car you no longer drive and may find yourself in a similar negative equity situation with your next vehicle.

Keep in mind that both the car's price and the trade-in value are open to negotiation. For the best outcome, it's advisable to negotiate the trade-in and the car purchase as separate transactions.

To secure a favorable deal, focus on obtaining a competitive interest rate for your new loan and ensuring fair prices for both the trade-in and the new car. By approaching these aspects separately, you can work towards an overall good deal.

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