How to Trade in a Car with a Loan


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UPDATED: 2021-04-20T17:45:21.573Z
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A couple at a car dealership trying to trade in a car with a loan.

If you want a new car, but you’re still paying for your current car, you’re in luck. Drivers regularly decide to buy a new car before they have finished their loans.

Before you start the process of trading in a car while still paying off your loan, take the time to prepare yourself for potential situations and outcomes.

Know the Numbers

Before heading to the dealership, you should do some research about the car you want to buy. It is helpful to understand the sticker price and available discounts. Then, before trading in your car when still paying off the loan, you should find out how much you owe on your automobile.

If you still have a loan, you will have one of two situations: positive or negative equity. With so many modern car loans having longer terms, many car buyers have negative equity as it takes longer for them to reduce their loan principles. Negative equity involves owing more than the car’s value.

Positive equity means that your car is worth more than you owe. This is the best situation because you can use that equity as a down payment on your new vehicle.

Hopefully, you have positive equity. If you don’t, then the dealership will add the negative equity into your new loan. Then, you will still be making payments on a car you are no longer driving. Interest will also accrue while you are paying on the negative equity.

This means you are paying for a car you no longer drive.

What to Do With Negative Equity

If you have negative equity, you have a few options. The first is to add the negative equity into the new loan. The second is to pay the negative equity in cash.

The third is to keep driving your car and wait until you have equity to use as a down payment. If you are trying to be fiscally responsible, making loan payments on a car you no longer drive isn’t wise.

Why Cars Have Negative Equity

Unfortunately, when you buy a car and drive it off the lot, the car immediately loses value. In some cases, that value is as much as 20% of what you paid. If you want to trade your car when still paying off your loan, you should wait at least a year or two. Most borrowers do not earn any equity until the second or third year.

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How to Trade in a Car with a Loan

As many borrowers get car loans with five-, six-, or seven-year terms, it pays to get the best trade-in value on your car and the lowest price on the new car.

Find Out Your Car’s Value

Your car has value. To find it, you can look at online sources and take it to several dealerships. Many car dealerships rely on Kelley Blue Book for accurate prices. You can also turn to Autotrader to get an instant cash offer.

When you trade-in your car, dealerships use the “trade-in” value which is lower than your car’s actual value. If you want more money for your car, you can sell it on your own. Private seller values are always more than trade-in values, but when you sell your car on your own, you have to work harder to get that higher amount.

Contact Your Lender

To determine if you have positive or negative equity, contact your lender. Ask them for the daily payoff value, and ask if they charge penalties for paying off a loan early. They will tell you the exact dollar amount you would need to pay to end the loan on that day.

Once you get the payoff amount, compare it to the instant cash value or the trade-in value on Kelley Blue Book. If you owe more, then you have negative equity. If you owe less, you have equity to use as a down payment.

Get Several Offers

If you take your car to a dealership and you get an offer that you don’t like, you can leave. Car dealers do not use science to value used cars. One dealership might offer you thousands more than another. But, they also might up the price of the new car you want to buy.

Before you sign on the dotted line, ask the dealerships to give you itemized offers. You can see what they are giving you for your trade, and what they are charging you for the new car. You want the best deal at both ends.

Car dealers know that car buying is an emotional process. They expect buyers to buy. If you do not like the deal and the dealership is unwilling to change it, you can leave.

If the dealership wants to sell a car to you, they will make adjustments to the offer. You should expect a phone call or email from the dealership. If they don’t call, then they are giving you the best offer they can.

Know Your Credit Score

Before you trade-in your car for a new one, knowing your credit score can save you money over the term of the loan. Car dealerships rely on credit scores to determine interest rates for loans. If your credit score is good, your new loan will have a low-interest rate. If your credit score is low, lenders will give you a high-interest rate. Your monthly payment depends on a good credit score.

So, if you have negative equity and a low credit score, you might be better off waiting to buy a new car. You can use that time to pay down your loan and build your score.

Double-Check Your Numbers

After negotiating, use your own calculator to check the numbers. Be sure the interest rate is the lowest they can give you. Check that your trade-in has the right value and the dealership has given you the best possible price on your new car.

Another thing to keep in mind is to watch out for any scams at your dealership, especially if you are in one of the worst states for auto-related fraud. Fraud can happen at car dealerships in the form of dishonest business practices that could cost you money.

A few weeks after you’ve closed the deal, contact your original lender to be sure the dealership closed your loan. Once you buy the car, you may have a grace period before you are required to have an active car insurance policy.

Before you buy car insurance, make sure to shop around and compare prices to find the best policy at the best price. Use our free tool below to get quotes.

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Image source: Nejron Photo/ shutterstock.com

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