Do you want to trade in your car before paying off the loan? It is possible, but there are a few things you should consider before taking this option.
In this guide, we’ll explain everything you need to know about trading in a vehicle that’s still being paid off and answer some frequently asked questions.
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Can I trade in a car I’m still paying for?
Yes, you can trade in a car you’re still paying for. However, your car loan doesn’t go away if you switch.
When you trade in a financed vehicle, the trade-in value of your car is applied as credit towards your next loan. Depending on the remaining loan balance, this credit could cover the remaining amount you owe. If you don’t, your dealer will reverse your loan, combining the shortfall with the amount you owe on your new car.
Consolidating what you owe into a single new loan helps you better manage your payments. But as you might have guessed, the new loan will likely have a much higher balance.
What are the risks of negotiating a car with a loan?
There are some risks associated with trading in a car that has a loan. Considering the risks can help you decide if trading in your car is the right decision at this time.
First, it’s important to understand that taking out another car loan can make payments more difficult. Your new loan balance will include the amount you owe on the old loan and the amount you owe on the current vehicle. This will result in a much higher monthly payment and potentially higher interest rates over the life of the loan.
Another thing to keep in mind is that taking on more debt means you may have negative equity in your vehicle. This happens when you owe more on the car than it’s worth. Having negative equity, also called “upside down,” makes it much more difficult to trade in or sell your vehicle until you have positive equity.
How do I trade in a car with a loan?
The process of negotiating a car loan is fairly simple, but it’s important to understand the process before you start shopping for a new car. Here are the general steps you’ll need to follow:
- Find a new car that fits your budget: Start shopping for new or used vehicles that you can comfortably afford. You can use an online calculator to find out what your monthly payment will be, based on your down payment, credit score and loan term.
- Confirm the trade-in price of your car: Find out how much you can get for trading in your vehicle. Car and driver, has a calculator that provides an exchange estimate. But ultimately, you’ll need to take your car to the dealership for an in-person trade-in offer.
- Take the procedures to the dealership. When you trade in a financed vehicle, the dealer will need to go through some paperwork to verify your ownership and loan information. Here are some of the information and documents you should have on hand:
- Your loan account number
- Your loan balance
- Your driver’s license
- Registration number of your vehicle
- Your car keys
- Your car title (if you have one)
- Proof of insurance
- A printout of your exchange value (if you have one)
- The dealer contacts your lender: In most cases, the dealer will contact your lender and pay off your original loan in full using your trade-in value as credit. If you still owe money after applying your trade-in credit, that amount will be rolled over to your next car loan and added to your balance.
- The dealer is in charge of the documentation: The dealer takes care of all the paperwork for you when you trade in a car with a loan. They will also transfer the title of your old car into their name and the title of your new car into your name. You will also sign the new loan paperwork before leaving the dealership.
- Start paying off the new loan: The final step is to start paying off the new loan. Normally, you have about a month between the purchase of the vehicle and the payment term of the first loan. Consider setting the bill to autopay or setting a reminder so you don’t miss the due date.
What about the vehicle I trade in?
It’s up to the dealer to decide what happens to your car after you trade it in. But in most cases, the dealer can sell it to another customer or auction it off to another dealer.
Is it a good idea to trade in a car with a loan?
Trading in a car for a loan can be a good idea in some situations. This is when trading in a car before it has been paid off can be potentially beneficial.
- Your car is high ownership costs: If your car gets poor gas mileage or often needs expensive repairs, it may be financially smart to trade it in. Choosing a car that is cheaper to own can help you save money in the long run.
- The dealer has great incentives: Dealerships often have promotions that make trading in your vehicle more attractive. For example, you may be able to get a higher trade-in value during year-end sales when the dealer clears out old inventory and makes room for new inventory.
- Lower sales tax requirements: In some states, if you trade in your vehicle and buy a new one, you only have to pay sales tax on the difference in price. If you’re looking for the best possible deal, you might want to take advantage of this.
When to avoid trading in a car with a loan
There are several circumstances where trading in a car for a loan doesn’t make sense. You may want to delay your exchange if:
- Your loan is fairly new: Cars depreciate as soon as they leave the dealership. If you recently took out a loan, you may still be down, where you owe more than the car is worth. In this case, it is best to wait until the loan balance is lower before trading in the car. Otherwise, you could have great financial success.
- You will be penalized. Some lenders charge prepayment penalties for paying off loans before the end of the loan period. These additional charges, detailed in car loan conditions, help offset the interest your lender won’t receive when you pay in advance. These penalties can be so strong that it’s not worth trading in your car until the loan is repaid.
I want to get rid of my car – what other options do I have?
Selling your car privately, rather than trading it in, is another good option if you want to get rid of your car before paying off the loan. There are many websites that make it easy to sell your vehicle to people in your area, including Facebook Marketplace, eBay Motors, and Craigslist.
The price you will receive for your car through a private sale it is usually more than its exchange value. This is because the dealership wants to make money off your vehicle when you trade it in. If you’re still paying off your car, you can use the money you make from your private sale to pay off your loan and transfer the clean title to the new owner.
If the money you make from your private sale doesn’t cover your loan balance, talk to your lender. They may be able to transfer your car loan to a personal loan or suggest another good option to pay off your debt.
Since you don’t have a dealer working on your behalf, you will need to handle all the necessary paperwork in a private sale. It will involve getting a clean title from your lender and drawing up a bill of sale to give to the new owner.
You’ll also need to advertise the car, screen potential buyers, schedule test drives and field questions about the car’s history.
Although selling a car privately is more work for you, it’s often worth the higher payment, especially if you need extra money to pay off your loan.
Finance and insurance editor
Elizabeth Rivelli is a freelance writer with over three years of experience in personal finance and insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His name has appeared in dozens of online financial publications, including The Balance, Investopedia, Reviews.com, Forbes and Bankrate.
