Do you want to trade in your car before the loan is paid off? It is possible, but there are a few things you should consider before taking this option.
In this guide, we explain everything you need to know about trading in a vehicle that is still being paid off and answer some frequently asked questions.
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Can I trade in a car I’m still paying off?
Yes, you can trade in a car that you are still paying off. However, your car loan does not disappear when you trade in your car.
When you trade in a financed vehicle, your car’s trade-in value is applied as a credit towards your next loan. Depending on the remaining loan balance, this credit may cover the remaining amount you owe. If it doesn’t, your dealer will rollover your loan and combine the shortfall with the amount you owe on your new car.
Consolidating what you owe into a single, new loan helps you better manage your payments. But as you might have guessed, the new loan will likely have a much higher balance.
What are the risks of trading in a car with a loan?
There are some risks associated with trading in a car that has a loan. Considering the risks can help you decide whether trading in your car is the right decision.
First, it’s important to understand that taking out another car loan can make it more difficult to afford the payments. The balance of your new loan will include the amount you owed on the old loan, and what you owe on the current vehicle. This will result in a much higher monthly payment, and possibly higher interest rates over the life of the loan.
Another thing to consider is that taking on more debt means you may have negative equity in your vehicle. This happens when you owe more on the car than it is worth. Having negative equity, also called being “upside down,” makes it much more difficult to trade in or sell your vehicle until you have positive equity.
How do I trade in a car with a loan?
The process of trading in a car with a loan is fairly simple, but it’s important to understand the process before you start shopping for a new car. Here are the general steps you will need to follow:
- Find a new car that fits your budget: Start shopping for new or used vehicles that you can comfortably afford. You can use an online calculator to find out what the monthly payment will be based on your down payment, credit score and loan term.
- Confirm your car’s trade-in price: Find out how much you can get for trading in your vehicle. Car and Driver, has a calculator that provides a trade-in estimate. But eventually, you’ll need to take your car to the dealer to get a trade-in offer in person.
- Bring paperwork to the dealer. When you trade in a financed vehicle, the dealer will need to see paperwork to verify ownership and your loan information. Here are some of the information and documents you should have on hand:
- Your loan account number
- Your loan balance
- Your driver’s license
- Your vehicle registration
- Your car keys
- Your car’s title (if you have it)
- Proof of insurance
- A printout of your trade-in value (if you have one)
- The dealer contacts your lender: In most cases, the dealer will contact your lender and pay off your original loan in full using your trade-in value as the credit. If you still owe money after the trade-in credit is applied, that amount will be carried over to your next car loan and added to the balance.
- The dealer handles the paperwork: The dealer handles all the paperwork for you when you trade in a car with a loan. They will also transfer the title of your old car into their name and transfer the title for your new car into your name. You will also sign the paperwork for the new loan before leaving the dealership.
- Start paying the new loan: The final step is to start paying your new loan. Usually you have about a month between purchasing the vehicle and when the first loan payment is due. Consider putting the bill on autopay or set a reminder to yourself so you don’t miss the deadline.
What happens to the vehicle I trade in?
It is up to the dealer to decide what happens to your car after you trade it in. But in most cases, the dealer can sell it to another customer or auction it off to another dealer.
Is it a good idea to trade in a car with a loan?
Trading in a car with a loan can be a good idea in some situations. Here’s when trading in a car before it’s paid off can be potentially beneficial.
- Your car has high cost of ownership: If your car gets poor gas mileage or often requires expensive repairs, it may be financially smart to trade it in. Choosing a car that is cheaper to own can help you save money in the long run.
- The merchant has great incentives: Dealers often have promotions that make trading in your vehicle more attractive. For example, you may be able to get a higher trade-in value during end-of-year sales when the dealer clears out old inventory and makes room for new inventory.
- Lower sales tax requirements: In some states, if you trade in your vehicle and buy a new one, you only have to pay sales tax on the price difference. If you’re looking for the best deal possible, this is something you might want to take advantage of.
When to avoid trading in a car with a loan
There are several circumstances where trading in a car with a loan doesn’t make sense. You may want to delay your trade-in if:
- Your loan is fairly new: Cars depreciate as soon as they leave the dealership. If you recently took out a loan, you may still be upside down, where you owe more than the car is worth. In this case, it is best to wait until the loan balance is lower before trading in the car. Otherwise, you could take a big financial hit.
- You will be penalized. Some lenders charge prepayment penalties for paying off loans before the end of the loan period. This extra cost, spelled out in the car loan terms, helps offset the interest your lender won’t get when you prepay. These penalties can be so steep that it’s not worth trading in your car until the loan is repaid.
I want to get rid of my car—What other options do I have?
Selling your car privately instead of trading it in is another good option if you want to get rid of your car before the loan is paid off. There are many websites that make it easy to sell your vehicle to people in your area, such as Facebook Marketplace, eBay Motors, and Craigslist.
The price you will receive for your car through a private sale is usually more than its trade-in value. This is because the dealer wants to make money on your vehicle when you trade it in. If you are still paying off your car, you can use the money you make from your private sale to pay off your loan and clear the title to the new owner.
If the money you earn from your private sale doesn’t cover your loan balance, talk to your lender. They may be able to transfer your car loan to a personal loan or suggest another good option to repay your debt.
Since you don’t have a dealer working on your behalf, you will have to handle all the paperwork required in a private sale. This will involve getting a clean title from your lender and drawing up a bill of sale to give to the new owner.
You’ll also need to advertise the car, screen prospective buyers, schedule test drives, and field questions about the car’s history.
Although it’s more work for you to sell a car privately, it’s often worth the higher payout, especially if you need extra money to pay off your loan.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.