Can I Trade in My Car if I Still Owe?

You can trade in your car to a dealership if you still owe on it, but this can be a costly decision if you have negative equity.

Trading in a Car You Still Owe On

Can I Trade in My Car if I Still Owe?Many people don't wait until they've paid off their car before they consider trading it in. This is usually because what you need in a vehicle changes during the time you're still paying on it. You may want something bigger as your kids grow, or something newer and nicer if your financial situation has changed for the better.

One option is trading in your old car during the process of buying your next vehicle at a dealership. It's convenient, because the dealer can pay off the loan balance if you still owe, and, in an ideal scenario, it also reduces the purchase price of the vehicle you're buying.

If you still owe, the dealership takes your old car, pay the loan balance to assume possession of the title, and then it's theirs to resell. The dealer takes care of all the paperwork for you.

However, before you start this process, you need to know if you have equity in your vehicle.

Trade Equity

Trade equity is the difference between what your vehicle is worth and how much is still owed on it. If your car is paid off, its entire value is equity that you can use as a down payment.

At the same time, let's say you owe $6,000 on your loan and the dealership is offering $8,000 for your trade-in. In this case, you have $2,000 of equity that you can pocket or put toward your next vehicle to knock down its price.

You should look into where you stand with your trade-in by doing some research before heading to a dealership. Figure out how much you still owe by contacting your lender and asking for a 10-day payoff amount – this will be your remaining loan balance plus 10 days worth of interest charges, or the rough amount a dealership needs to pay when you trade in the car. Then, you can either research your car's value on vehicle valuation sites like NADA or have it appraised at a few dealerships to see what they're willing to offer.

If you find that you owe more on your loan than the car is worth, then you have negative equity, which can complicate the trade in process.

Trading in a Car with Negative Equity

Having negative equity is sometimes called being upside down or underwater. Because cars depreciate in value over time, many buyers find themselves in this situation – especially if their loan term is long or they put little to no money down.

If you're trying to trade in a car with negative equity, be aware that the difference between your loan payoff amount and the car's value isn't going away. Your two main options are to pay the difference out of pocket, or roll the negative equity into your new loan.

Rolling over negative equity can be a costly decision – if a lender allows you to in the first place. This increases your loan balance and monthly payments, leads to increased interest charges, and puts you immediately in a negative equity position in the new loan. For these reasons, this is a route that's best avoided, even if it means waiting to purchase another car until your equity position in your current vehicle has improved.

A final option car buyers with negative equity can explore are new car rebates. Many automakers offer cash on the hood of certain new vehicles, so you can get thousands of dollars of cash back by financing one of them. You can use the cash back rebate to cover your negative equity, or at least a portion of it, to help you reduce the impact of trading in a car you’re upside down on.

The Bottom Line

You can trade in your car if you still owe, but you need to understand your equity position. Make sure you're aware of how any equity or negative equity is being handled before signing anything.

Regardless of whether or not you have a vehicle to trade in, it can be tough finding a dealership that can help you get financed, especially if you're dealing with credit problems. The Car Connection wants to point you in the right direction by connecting you with a local special finance dealership. Fill out our free and secure auto loan request form to start the process right now.


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