When you’re ready to upgrade your ride, trading in a financed car can seem like a complicated process. Whether you’re looking to trade in a car for a new one or simply want to get rid of your current vehicle, it’s important to understand how the car trade-in process works when you still owe money on the car loan. This comprehensive guide will walk you through the steps of trading in a financed car, what happens to your loan balance, how to deal with negative equity, and whether it’s the right choice for your financial situation.
Can You Trade in a Financed Car?
Yes, you can trade in a financed car. It’s actually quite common for people to trade in cars that still have an outstanding loan balance. In fact, dealerships handle these types of transactions regularly.
However, the process requires careful attention to detail. You’ll need to work with the dealership to settle your loan balance before finalizing the trade-in. Here’s how it works:
- Loan Balance Settlement: When you trade in your financed vehicle, the dealership will pay off your remaining loan balance (also called the car loan payoff).
- Vehicle Trade-in Value: The dealership will then offer you a trade-in value for the car. This amount is used to pay off your loan, and if there’s any remaining amount, it could be used toward the purchase of a new vehicle.
It’s important to note that the trade-in loan balance and the value of the car might not match up. In some cases, you may owe more than the car is worth, leading to negative equity.
How Does Trading in a Car with a Loan Work?
Trading in a car with a loan is a simple but multi-step process. Here’s how the car trade-in process works:
- Determine Your Loan Payoff Amount
Before you visit the dealership, contact your lender to determine the exact amount you owe on your loan, including any fees or early payoff penalties. This is your car loan payoff. - Get a Car Value Estimate
Next, get an estimate of your car’s value using tools like Kelley Blue Book or Edmunds car estimate. These platforms provide a good starting point for the vehicle trade-in value, but keep in mind the dealership may offer a different price based on demand and market conditions. - Visit the Dealership
Take your car to the dealership, where they will inspect its condition, review your loan details, and provide you with a dealer trade-in offer. The dealership will factor in things like car depreciation and vehicle resale value. - Car Loan Payoff Process
If you owe less on your loan than the trade-in value, the dealership will pay off your loan and you may have extra funds to apply toward a new car purchase. If the car’s value doesn’t cover the loan balance, you’ll need to figure out how to handle the loan balance transfer. - Finalizing the Trade-In
Once everything is agreed upon, the dealership will pay off the car loan balance, and any remaining equity (if any) will go toward your new purchase or be returned to you.
What Happens to the Loan When You Trade It In?
When you trade in a car loan, the remaining loan balance will be paid off by the dealership. However, the situation can get tricky if you owe more than your car is worth, which leads us to the issue of negative equity.
- Paid Off Loan: If the trade-in value exceeds your car loan balance, the dealership settles the loan, and you receive the difference as credit toward your next purchase.
- Negative Equity: If your loan balance exceeds the car’s trade-in value, you will need to address the negative equity impact. In many cases, dealerships allow you to roll over the loan balance into a new car loan. This is called a loan rollover.
In either scenario, it’s important to understand how this will affect your next car payment and financing options for cars.
Trading in a Car with Negative Equity
Negative equity occurs when the loan balance on your car is higher than its current market value. This situation is more common than you might think, especially if your car has depreciated quickly or you’ve had the car for a short period.
If you’re in this situation, there are a few options to handle the negative equity impact:
- Roll Over the Loan Balance into a New Loan
The most common solution is to roll over the loan balance into your next vehicle’s financing. This means that the remaining amount you owe on the current vehicle will be added to your new car loan. However, this option can increase your monthly payment and overall debt. - Pay Off the Difference
If you have the funds, you can pay off the difference between the car loan payoff and the trade-in equity. While this is not always ideal, it can help you avoid higher payments on your next car loan. - Keep the Car and Pay Off the Loan
If possible, you can also choose to keep the car and pay off the loan. This option may not be the fastest solution, but it allows you to avoid taking on additional debt.
Example of Negative Equity:
Suppose you owe $15,000 on your car loan, but your car’s trade-in value is only $12,000. The $3,000 difference is your negative equity. If you choose to roll over the loan balance, that $3,000 will be added to your next car loan, resulting in a higher loan amount and possibly higher monthly payments.
How to Trade in a Financed Car: A Step-by-Step Guide
Trading in a financed car involves several steps, but with the right preparation, you can make the process as smooth as possible.
1. Get Your Car Loan Payoff Details
Before heading to the dealership, call your lender and ask for the car loan payoff amount. This will help you understand how much you owe and what to expect during the trade-in process.
2. Estimate Your Car’s Value
Use Kelley Blue Book or Edmunds car estimate to get an idea of your car’s worth. These tools give you a car value estimate based on your car’s make, model, year, mileage, and condition.
3. Shop Around for Offers
Visit multiple dealerships to get the best dealer trade-in offers. Make sure to ask about any possible incentives or special offers that could affect your trade-in equity.
4. Negotiate the Trade-In Offer
Once you have offers, don’t be afraid to negotiate trade-in value. Many dealerships will be open to negotiation, especially if you’re planning to finance your new car through them.
5. Finalize the Loan Payoff Process
Once you’ve agreed on the trade-in value, the dealership will pay off your remaining loan balance. If there’s any remaining equity, it will be applied toward your new car loan or returned to you.
Does Selling a Financed Car Hurt Your Credit?
One of the common concerns when trading in a financed car is how it might affect your credit score. Here’s what you need to know:
- Timely Loan Payoff
If you successfully settle the loan payoff remaining balance, your credit score should not be negatively impacted. Paying off the loan on time is a positive mark on your credit report. - Rolling Over Debt
If you roll over the loan balance into a new car loan, your credit score may be affected by the increased debt and monthly payments. However, this can be mitigated if you stay on top of your payments. - Defaulting on Payments
If the dealership does not pay off your loan as agreed or if you default on your loan after trading in the car, your auto credit score impact can be significant. Always ensure that the dealership handles the loan balance transfer properly.
Is It a Good Idea to Trade in a Financed Car?
Whether it’s a good idea to trade in your financed car depends on your financial goals. Here are some things to consider:
Pros of Trading in a Financed Car:
- Upgrading to a Newer Car: If your current car is no longer reliable or doesn’t meet your needs, trading it in for a new car purchase may be the right choice.
- Avoiding Payments on a High Interest Loan: If you’re paying high auto loan interest rates, you can refinance the loan or roll it into a new loan with better terms.
- Simplified Process: Trading in at a dealership simplifies the process of selling a car, as they handle most of the paperwork for you.
Cons of Trading in a Financed Car:
- Negative Equity: If your car has lost significant value, you may end up rolling over the loan balance, which can add to your financial burden.
- Higher Monthly Payments: Rolling over debt can result in higher car payments and more interest paid over time.
Conclusion
Trading in a financed car is possible, but it comes with its challenges, especially if you have a negative equity situation. It’s essential to carefully assess your current loan balance, the car’s value, and your financial goals. By understanding the car loan payoff process, you can make an informed decision and navigate the trade-in car loan process smoothly.
Also Read More Article : Why No One Wants a New Car Right Now
