How to Trade in a Car With an Existing Loan

November 24th, 2021 by

Things to Consider Before Trading in a Car With a Loan Balance

If you’re in the market for a new car, you may be wondering what to do with your old one — especially if you still owe money on it. Sadly, your car payment doesn’t just disappear when you buy a new vehicle. However, you can trade-in your car for a new one even if you’re still making payments on it.

As tempting as it may be to swap your old car for a brand-new set of wheels, there are several things to consider before making this decision. Keep reading to learn more about your options when trading in a car with a loan balance.

Negative vs. Positive Equity

Before trading in a car with a loan, the first thing you need to do is get the payoff statement from your lender. This document details the exact amount of money needed to fully pay off your debt, including any interest, fees, or possible prepayment penalties.

When trading in a car with a loan balance, you also need to calculate how much equity you have in the vehicle. This is the difference between your car’s current trade-in value and the amount you still owe on its loan — and will determine whether or not you have positive or negative equity.

If your car’s value is more than the amount you owe on your loan, then you have positive equity. Meanwhile, if you owe more on the loan than your car is worth, you have negative equity. Let’s take a closer look at the differences between positive and negative equity, and how to trade in your car depending on which type you have. 

Trading in a Car With Positive Equity

When you trade-in your car at a dealership, its current value is subtracted from the price of the vehicle you are purchasing. Having positive equity means the dealer will apply any equity that you have towards the purchase of a new car — reducing the amount you’ll need to finance.

For example, if you owe $5,000 on your car and it’s worth $7,000 as a trade-in, then you’ll have $2,000 worth of equity to go towards your new vehicle. In addition to applying positive equity towards your purchase, you can also make a down payment to further decrease the overall loan balance.

Related: How to Get the Best Price for Your Trade-in 

Trading in a Car With Negative Equity

When trading in a car with negative equity, you have three options: pay the difference, transfer the negative equity, or delay the trade-in altogether. Let’s take a closer look at each of these choices.

1. Pay the Difference

If you are trading in a car with negative equity, you have the option to pay the difference between what your trade-in is worth and how much money you owe on your current loan. For example, if you owe $10,000 on a car that is worth $9,000, you could trade-in the vehicle and pay the $1,000 difference. This is a great option that can help keep your new loan amount lower and give you peace of mind that you no longer owe debt on that old car.

2. Transfer the Negative Equity

Another option when trading in a car with a loan is to roll the negative equity over to your new car. For example, if you owe $10,000 and are buying a car for $25,000, your new loan will be $35,000. While this option may seem convenient, it will immediately flip you upside-down on your loan again. This also increases the amount of your new loan, meaning you might end up paying more in interest or borrowing more than your car is worth.

3. Utilize a Rebate

Many manufacturers offer rebates to qualifying buyers, which can be helpful if you are upside-down on your loan. Typically expressed as cash amounts, a rebate offers an incentive to purchase a particular make or model. If a manufacturer provides an $8,000 rebate and you owe $10,000 on your current car, this means that only $2,000 will remain. You can either roll this remaining fee over to your new loan or pay it off. Because a rebate is offered at the manufacturer level, you can go to any dealership and take advantage of one of these offers.

4. Delay the Trade-in

If you are upside-down on a car loan, delaying the trade-in until your vehicle is fully paid off is typically the smartest decision financially. However, if you are struggling to make monthly payments, trading in for a new car can allow you to downsize to a less expensive vehicle. If you can’t wait until you pay off the loan completely, then at least postpone purchasing a new car until your equity is positive.

Trade-in Your Car for a New Vehicle From M&L

Trading in a car with a loan is possible, and we’re here to help make the process as smooth as possible! Our trade-in value calculator can help you determine how much your car is worth and whether you have positive or negative equity. Simply input some information about your car into the calculator, as well as your contact information, and you’ll have an estimate right away.

If you have any questions about how to trade-in your car with a loan, don’t hesitate to contact us. And in the meantime, click the button below to value your trade and see what your car may be worth!

Posted in Auto Loan, Trade/Sell