How to Trade In a Financed Car: Everything You Need to Know
If you still owe money on your car but you’re eager to buy a new one, trading in your vehicle might be a good option. However, it doesn’t mean you’re off the hook for your current loan.
Before trading in a financed car, there are a few things you should do, like find out how much equity you have in the vehicle and calculate much car you can afford. Here’s how you can trade in a financed car, and several things to consider along the way.
How to Trade In a Financed Car
There are many reasons why you might want to trade in your vehicle before it’s paid off. Maybe you need to upgrade to a bigger vehicle, or you want to buy a car that comes with incentives or rebates.
No matter the reason, you don’t necessarily have to wait until you’ve paid off your current car to buy a new one. To trade in a financed car, follow these steps:
1. Check Your Car’s Value and Your Loan Balance
Before trading in a car, it’s important to know what your car is worth and how much you owe on it. You can get an estimate of your vehicle’s value using free online tools like Kelley Blue Book.
Ultimately, the dealership will determine how much your car is worth from their perspective, and make you an offer accordingly. However, getting an estimate ahead of time will give you an idea of how much you can get.
Next, figure out how much you owe on your loan. Ask your lender for a payoff amount document to calculate your current loan balance, which will help you find out whether you have positive or negative equity.
If you have positive equity, your car is worth more than what you owe. If you have negative equity, it means you owe more on your loan than the vehicle is worth.
Trading in a vehicle with positive equity gives you money to apply to the purchase of your next car, which can help reduce your monthly payments.
If you have negative equity, however, you still have to pay off the loan. You can either pay off the remaining balance in full or roll the balance into your new loan, giving you more time to pay it off.
2. Create a New Car Budget
Before you trade in your car, you should know how much money you can spend on your next car purchase. Keep in mind that your car buying budget will probably be affected by your current loan balance, and specifically, whether you have positive or negative equity.
If you have positive equity, you have more money to put toward the purchase of a new car. If you have negative equity, you might need to choose a vehicle at the lower end of your budget.
As you create your budget, you should also start shopping for auto loans to see what interest rate you can qualify for. Then, calculate how much car you can afford, to figure out roughly how much you can spend on a new car, based on your target monthly payment, estimated interest rate, and loan terms.
3. Prepare Your Car for the Trade-In
Before you head to the dealership, make sure your car is ready to go. Collect all the maintenance, repair, and warranty records, double check that the user manuals are in the glove box, and make sure that all your personal items are removed.
You might also consider getting the car professionally detailed and making minor cosmetic repairs to maximize your car’s trade-in value.
4. Go Car Shopping
Once you know what your current vehicle is worth and its trade-in value, it’s time to shop around. When you find a car you like, let the salesperson know you’d like to trade in your current vehicle.
They’ll take a look at the car and give you an offer based on the condition of the vehicle and the current market rate. This is where your research comes in handy. Be prepared to negotiate the price of your next car and your current car’s trade-in value based on your findings.
If you got pre-approved for an auto loan, bring along your pre-approval letter when visiting dealerships in your area. If the dealer works with their own lenders, see if they can beat or match your pre-approval interest rate.
5. Complete the Paperwork
Once you and the dealer agree on a trade-in value and the price of the new car, you’ll have to fill out some paperwork for both the trade-in and the new vehicle purchase.
Plus, there will be extra paperwork to complete if you get a new loan from the dealership. Review all paperwork carefully, and make sure the loan payments match what you’re expecting to pay before leaving the dealership.
6. Confirm the Auto Loan Is Paid Off
The dealer should make sure that your old auto loan is paid off, which happens when the balance is rolled over into your new loan (or you pay it off in full). However, it’s always a good idea to confirm that the lender received the remaining balance and that you no longer owe money.
How to Finance a Car With Negative Equity
If your car has negative equity, trading in your car can be more challenging, and definitely more expensive.
However, having negative equity shouldn’t stop you from trading in a financed car. Here are some options you have if you want to trade in a financed car with negative equity.
Wait to Buy a New Car
You’re allowed to trade in a financed car anytime. However, you’ll be responsible for paying off the negative equity before the dealership will accept the trade-in. If you don’t want to roll the balance into a new loan, consider waiting a little longer until you have positive equity.
Make a Higher Down Payment
If you have extra cash laying around, putting more money down on your new vehicle can be beneficial. This helps offset the increased car payment that comes when you trade in a financed car.
The more money you can put down on your purchase, the lower your interest rate and your monthly payment will be.
Take Advantage of Incentives
Many dealerships offer incentives for customers who trade in their vehicles. For example, you might get a higher trade-in value if you trade in your car and buy a new car from the same dealership on the same day.
Before you go car shopping, call a few dealerships in your area and ask if any are offering trade-in deals.
Pay More toward Your Loan Each Month
When you trade in a vehicle with negative equity, the biggest consequence is usually a higher monthly car payment. If you can’t qualify for a great low rate, think about making extra payments toward your loan each month or each quarter.
For example, if your monthly car payment is $350, see if you can make an additional payment of $100 every few months. Any extra money you pay toward your loan comes off the balance rather than the interest, which can help you pay down the loan faster.
Extend Your Car Loan
If you want to trade in a car with negative equity, you might think about extending the length of your loan. For instance, you’ll pay more interest on an eight-year loan than on a four-year loan, but longer loans have lower monthly payments. If you have the option to extend your auto loan, it could make your payments more manageable.
Tips for Trading In a Financed Vehicle
Before you trade in your car, here are some tips to help you throughout the process:
Shop around: Just as you shop around for auto loans and insurance rates, you can shop around for dealerships where you’ll trade in your current car. Some dealerships might offer better trade-in values, so it’s worth getting a few offers.Consider selling the car yourself: You can usually get more money when you sell your vehicle through a private party sale. If you’re looking to maximize the amount of money you can get and don’t mind the legwork, a private party sale can be a great option.Time your trade-in: Try to time your trade-in for when your remaining loan balance is less than the value of the car. This gives you positive equity to put toward a new vehicle purchase.Know the car’s value before shopping: Knowing your vehicle’s value can go a long way when you trade in your car. Do some research to understand what you can realistically get, and use that information to negotiate with the dealer.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
