Trading in your car is a great way to lower the cost of getting a new one, but what if you still have a balance left on your current car loan? Can you still go ahead with the trade-in? The good news is, yes, you absolutely can. However, it’s important to be aware of a few things when dealing with a car that isn’t fully paid off. Understanding how your loan balance affects the trade-in process is essential to making sure you get the best deal.
Understanding Trade-In Value vs. Loan Balance
Before trading in a car with an outstanding loan, it’s important to understand how your car’s trade-in value compares to the remaining loan balance. This will determine whether you have positive or negative equity, which impacts your trade-in options.
Positive Equity
If your car is worth more than what you owe, you have positive equity. This means that the trade-in offer from the dealership can be applied toward the down payment on your next vehicle. For example, if you owe $10,000 on your car, but it’s valued at $12,000, the $2,000 difference can help lower the cost of your new car or reduce the loan amount.
Negative Equity
If your car is worth less than what you still owe on it, you’re dealing with negative equity. For example, if you owe $15,000 but your car is only valued at $12,000, there’s a $3,000 gap. If your car’s value is less than your loan balance, you have a few choices. You can either pay off the difference yourself or consider adding the remaining balance to a new loan. However, rolling over negative equity means you’ll be financing a larger amount, which may increase both your monthly payments and the total interest you pay.
Steps to Take Before Trading In Your Car with a Loan
Step 1: Calculate Your Car’s Trade-In Value
Knowing your car’s trade-in value is essential before heading to the dealership. Use online resources to get an estimated value for your vehicle, which will give you a better sense of what to expect. Keep in mind that different guides might provide varying numbers, so it’s smart to compare the values from each and use the highest one as a starting point to negotiate the best deal.
Step 2: Determine Your Loan Balance
Reach out to your lender to get the exact amount remaining on your car loan. This is often called your payoff balance. Be sure to account for any interest or fees that may have accrued. If you’re unsure, you can request a payoff quote from your lender to get an accurate figure.
Step 3: Decide Whether to Pay Off the Loan or Roll Over the Balance
If you’re facing negative equity, you’ll need to figure out how to handle the gap between your car’s value and the loan balance. Pay off the difference upfront if you’re able. It’s the best option as it allows you to begin with a clean slate and a new loan for the full price of the new car. However, if covering the gap isn’t feasible, check with the dealer about rollover loans, which allow you to add the remaining balance to your new loan. While this may reduce your immediate costs, it could lead to higher monthly payments and more interest in the long run.
How to Trade In a Car You Owe Money On
Trading in a car with an outstanding loan can be a bit trickier than trading in one that’s fully paid off. However, once you’ve figured out your car’s trade-in value and confirmed how much you owe, you can follow these steps to successfully trade in your car with a remaining loan balance.
Visit Multiple Dealerships
Shopping around for trade-in quotes from various dealerships is a smart move to ensure you get the best deal. Some dealers may offer better terms or more competitive trade-in values, depending on their current inventory needs or demand for your car.
Negotiate the Trade-In Offer
Dealers typically start with a low offer, so don’t be afraid to negotiate. Be armed with your research from KBB, Edmunds, or NADAguides, and make sure they’re offering a fair price based on your car’s condition, age, and market value.
Understand the Loan Payoff Process
If you still owe money on your car, the dealership will usually settle the remaining loan balance with the lender as part of the trade-in. In cases of negative equity, the dealer may incorporate the remaining balance into your new loan, or you can choose to pay it off upfront.
Tips for Getting the Best Trade-In Offer
Shop Around for the Best Deal
Different dealerships may offer varying trade-in values for your car, so it’s smart to get quotes from multiple locations, including those that specialize in used cars. Take the written offers you’ve received from other dealerships to use as leverage in securing a better trade-in deal.
Look for Ways to Boost Your Car’s Value
Before trading in your car, take some time to clean it inside and out and take care of minor repairs. Showing the dealership that your car is well-maintained can potentially increase its trade-in value. Having maintenance records on hand can also help make your case, as it shows you’ve taken good care of the vehicle.
Be Prepared for a Negotiation
Dealerships aim to maximize their profit, so they may initially present you with a lower offer. Make sure to stay firm in your negotiation and be ready to walk away if the terms aren’t right for you. Having a solid understanding of your car’s market value and knowing the price you’re aiming for will give you the confidence you need during negotiations.
Common Mistakes to Avoid When Trading in a Car with a Loan
Ignoring Negative Equity
One common mistake is not addressing negative equity before you start the trade-in process. If you owe more than your car is worth, it’s important to plan and decide how you’ll handle the shortfall. Simply rolling over negative equity into a new loan without considering the long-term costs can lead to higher monthly payments and more debt.
Failing to Get Multiple Offers
Another mistake is not shopping around for multiple trade-in offers. As mentioned earlier, different dealers will offer different amounts for your car. Getting several quotes ensures you’re getting a fair deal.
Forgetting to Factor in Tax Savings
In certain states, trading in your car can help lower the sales tax on your new vehicle purchase. This can lead to substantial savings. Make sure to take any potential tax reductions into account when evaluating your trade-in offer.
A Fresh Start, Loan and All
You can trade in a car with an outstanding loan, and it’s simpler than you might think. Knowing both your loan balance and your car’s trade-in value will help you negotiate a good deal. This allows you to upgrade to a new car without waiting to pay off your old loan.