Trading in your car can be a convenient way to lower the price of a new vehicle. But what if you still owe money on your current car? Many car owners find themselves in this situation, wondering, “Can You Trade In A Car You Are Financing?” The short answer is yes, you absolutely can. However, there are several important factors to consider to ensure you make the best financial decision. This comprehensive guide will walk you through everything you need to know about trading in a financed car.
Understanding the Basics of Car Trade-Ins and Financing
Before diving into the specifics of trading in a financed car, it’s crucial to understand the fundamental concepts of car financing and trade-ins. When you finance a car, you’re essentially taking out a loan to pay for it. The lender holds a lien on your car, meaning they have a legal right to it until the loan is fully repaid.
A car trade-in involves offering your current vehicle to a dealership as part of the payment for a new car. The dealership assesses the value of your trade-in and reduces the price of the new car by that amount. This can significantly lower your out-of-pocket expenses and monthly payments for the new vehicle.
Yes, Trading In a Financed Car is Possible
Now, let’s address the main question: can you trade in a car you are financing? The answer is a definite yes. Dealerships routinely handle trade-ins of financed vehicles. The process involves the dealership determining the trade-in value of your car and then calculating the remaining balance on your existing loan.
If your trade-in value is higher than your loan balance (meaning you have equity), the dealership will pay off your loan and apply the remaining amount towards your new car. For example, if your car is worth $10,000 and you owe $8,000, the dealership pays off the $8,000 loan, and the $2,000 equity is used as a down payment for your new car.
However, things become a bit more complex if your trade-in value is lower than your loan balance (meaning you have negative equity, also known as being “upside down” on your loan).
Dealing with Negative Equity When Trading In
Negative equity is a common situation where you owe more on your car loan than your car is currently worth. This can happen due to rapid depreciation, especially in the early years of car ownership, or if you rolled over negative equity from a previous car loan.
When you trade in a car with negative equity, you still have options, but it’s crucial to understand the financial implications. There are typically two main ways to handle negative equity:
-
Pay the Difference in Cash: You can pay the negative equity amount out of pocket. In the example above, if your car is worth $8,000 but you owe $10,000, you would need to pay the $2,000 difference in cash to clear your loan.
-
Roll Over the Negative Equity: Many dealerships will allow you to “roll over” the negative equity into your new car loan. This means the outstanding balance from your old loan is added to the loan for your new vehicle. While this allows you to trade in your car without paying cash upfront, it’s important to understand that you are essentially borrowing more money and will pay interest on a larger loan amount over time. This can significantly increase your monthly payments and the total cost of your new car.
Rolling over negative equity is generally not advisable as it puts you in a worse financial position in the long run. It’s often better to wait until you have equity in your current car or save up to pay off the negative equity in cash.
Steps to Trade In a Car You Are Financing
If you decide to trade in your financed car, here are the key steps to follow:
-
Determine Your Car’s Trade-In Value: Use online tools like Kelley Blue Book (KBB) or Edmunds to get an estimated trade-in value for your car. Be realistic about your car’s condition and mileage. Getting an accurate estimate will help you negotiate effectively with dealerships.
-
Get Your Loan Payoff Quote: Contact your lender (bank, credit union, or financing company) to get an exact payoff amount for your current car loan. This quote is usually valid for a specific period. Knowing this figure is essential to understand your equity situation.
-
Shop Around for Trade-In Offers: Visit multiple dealerships to get trade-in offers for your car. Don’t accept the first offer you receive. Negotiate the trade-in value separately from the price of the new car to ensure you’re getting a fair deal.
-
Compare Offers and Finalize the Deal: Carefully compare the trade-in offers, new car prices, and financing terms from different dealerships. Once you’ve chosen the best offer, review all the paperwork thoroughly before signing. Ensure that the dealership clearly outlines how they are handling your existing loan and the trade-in value.
Trading in a car you are financing is a common practice, but it requires careful planning and understanding of your financial situation. By following these steps and being aware of the implications of equity and negative equity, you can make an informed decision and navigate the trade-in process successfully. Remember to prioritize your financial well-being and choose the option that best suits your needs and long-term financial goals.
