There are many reasons to trade in your vehicle before it’s paid off. Maybe you’re looking for something cheaper or more fuel-efficient. Or perhaps your family has grown, and you need something bigger. Whatever the situation, you might wonder if you can trade in your vehicle while you still owe money.
The good news is that it’s possible and relatively common to trade in a vehicle with a remaining loan balance. However, there are some important considerations to make before you do.
Key Points
- It’s possible to trade in a vehicle that’s not yet fully repaid.
- You should be aware of the outstanding loan balance and the trade-in value of your vehicle before trading it in.
- If you owe more on your loan than the car is worth, you’ll have ‘negative equity’, which means you’ll have to pay the difference when purchasing a new car.
Can You Trade In A Car That Is Not Paid Off?
Yes, trading in a car that isn’t paid off is possible.
Say you bought a car four years ago with a five-year loan. This means you still have one year of payments left. Even though you still owe money, you can trade in your car for a new one. This is known as a financed trade.
Trading A Car With Positive Equity
If you’re in positive equity territory – which means the car is worth more than you owe on your loan – the trade is easy. When you trade it in, the dealership will use the money to pay off your balance, and anything left over goes towards your new car.
For example, if your car trade-in value is worth $15,000 and you owe $5,000, the dealership will pay off your remaining $5,000 loan with the money from the trade, and $10,000 will go to your new purchase.
Just keep in mind that if you break your car loan contract early, you could be subject to early repayment penalty fees. Be sure to review your loan contract beforehand.
Trading In A Car With Negative Equity
While it’s still possible to trade in a car with negative equity, it adds an extra step. Negative equity is when your car is worth less than what you owe.
For example, if you owe $15,000 on your loan but your car is only worth $10,000, you have $5,000 in negative equity.
If you owe more on your car loan than what your car is worth, you have a few options:
Come Up With The Difference
One option is to come up with the difference between your remaining loan balance and your car’s market value. Using the above illustration as an example, you would pay off your $5,000 of negative equity.
Roll The Balance Into A New Loan
Alternatively, when you purchase a new car, the dealer can roll your remaining loan into the car loan. Some lenders allow negative equity to be rolled over into a new auto loan, which means that the outstanding balance on your existing loan is added to the new loan. For instance, if you were to take out a new $40,000 loan, the dealer would add the remaining $5,000 for a total of $45,000.
Keep in mind that rolling your negative equity into a new loan is not always a good idea. If you do this, you could be starting your new car loan with negative equity again. Right off the bat, you’ll owe more than the vehicle is worth, making it more difficult to build equity in the new vehicle.
How To Trade In A Car That Is Not Paid Off?
If you’re ready to trade in your car for something new, follow these steps:
Step 1: Determine How Much You Owe
You don’t want to make any decisions until you know your numbers. Call your lender and ask them how much you have left on your car loan. Or, check your current loan statement to see how much is left to pay on your loan.
Step 2: Find Out Your Car’s Trade-In Value
Next, you want to estimate the value of your vehicle. Having an idea of what your car is worth can help you in negotiations with dealerships. You can refer to resources like Canadian Black Book and Kelley Blue Book to get started.
Step 3: Gather Your Documents
Trading in your vehicle and taking on a new loan will require a few necessary documents, including the following:
- Vehicle registration
- Current loan statement that shows the loan account number and balance
- Driver’s license
- Personal identification
- Proof of income
- Proof of employment
Step 4: Negotiate A Trade-In Car Deal
To find the best deal, collect multiple offers from different dealerships. Now that you’ve done your research and know what your car is worth, don’t shy away from negotiating.
Learn more: Should I Trade-In My Used Vehicle Or Not?
Pros And Cons Of Trading In A Car That’s Not Paid Off
Before trading in your car while still paying your car loan, you should first weigh the benefits and drawbacks.
Pros Of Trading In A Car That’s Not Paid Off
The following are some of the potential advantages of trading in your vehicle before you’ve paid off your car loan:
- Lower Car Payments. If you trade in your car for a cheaper one, you may be able to reduce your loan payments.
- Save Money. If you have positive equity in your car, you can put it towards the purchase of a new car without having to come up with a down payment (as long as you’re not spending more on a new car than what you paid for your current vehicle).
- Convenience. The dealership will take care of the paperwork and loan payoff on your behalf.
- Save Time And Effort – There’s no need to find a private buyer for your vehicle.
Cons Of Trading In A Car That’s Not Paid Off
Consider the following risks of trading in your car before you’ve paid off your loan:
- Possible Negative Equity. If you roll over your debt into a new loan that’s higher than the value of the car you’re buying, you could start off your loan with negative equity.
- Less Money For Your Car. Generally speaking, selling a car privately can get you more money compared to trading it in at a dealership. Selling privately lets you set your own price and negotiate with the buyer, while dealerships usually offer less because they have to resell the vehicle for a profit.
Where Can You Trade In A Financed Car?
Most car dealerships will accept financed trade-ins. One of the major benefits of going to a dealership is that it will handle all aspects of the trade, including the paperwork. This can simplify the entire process for you.
Is There A Penalty For Trading In Your Financed Car?
Your lender might charge a prepayment penalty if you pay off your loan before the end of the loan term. Before you start the trade-in process, contact your lender or refer to your loan agreement to see if there is a prepayment penalty and how big it is. If there is one, run your numbers to see if a trade-in makes financial sense.
Can You Trade In A Financed Car For A Cheaper Car?
If your car payments are too much to handle or you want to downsize, it’s possible to trade your vehicle in for a more affordable option.
The dealership will use the money you earn from your trade to pay off your loan balance, and the remaining funds can go towards a new car.
Can You Trade In A Financed Car For A More Expensive Car?
If you have your eye on a nicer, newer, more luxurious ride, it’s possible to trade your financed vehicle in for something more expensive.
However, trading in your car for a more expensive one means taking on a bigger loan. You’ll need to qualify for a larger loan amount, which means the lender may check your credit score and verify your finances before approving you for a higher loan.
To keep things affordable, you may opt for a longer loan term. However, extending your loan term means you may owe more in interest over the long term. It also means you’ll be in debt longer.
Can You Sell Your Car If It Isn’t Paid Off?
Yes, it is possible to sell your car if it isn’t paid off. But, you don’t technically own your car until your loan is paid off. So, you’ll have to pay off your debts before transferring the car title (proof of ownership) to the buyer.
With an outstanding loan remaining on your car, your lender still has a lien on the title. Until you fully repay your debt, the lien will remain.
What Affects The Trade-In Value Of My Car?
Many things impact your car’s trade-in value, including the following:
- Age: Older vehicles typically have lower trade-in values.
- Mileage: Vehicles with high mileage usually come with a lower trade-in value.
- Condition: Any issues with the car’s conditions, such as scratches, dents, or mechanical issues can decrease your car’s worth.
- Make And Model: Certain brands retain their value better than others due to demand and reliability.
- Location: Prices and car values may vary by region. For instance, an SUV may be more valuable in areas that get more snow compared with milder climates with more moderate weather.
- Vehicle History: Accidents or title issues can affect the resale value of a vehicle.
- Features: Extras such as leather seats or premium computer system may increase a car’s value.
Is Trading In Your Car Right For You?
Before trading in your vehicle, consider the following points to determine whether or not it’s a suitable option:
| Consider Trading In Your Car If … | Don’t Trade In Your Car If … |
| You have positive equity. | You have negative equity. |
| You don’t have time to sell privately. | Your monthly payments are too high but your car is not worth enough to get a new loan with lower payments. |
| You lack the negotiation skills to sell privately. | You’re good at negotiating. |
| Your current car no longer fits your lifestyle. | You don’t mind taking the time and effort to find a private buyer. |
| Your monthly payments are too high and you can get a lower monthly payment with a trade-in. | The trade-in offer is much lower than your car’s private sale value. |
Final Thoughts
Trading in your vehicle is possible even if you still owe money on your car loan. It’s possible to trade in your vehicle if it’s not paid off. However, before trading in your car, ensure you understand what you’re getting into. If you have positive equity in your vehicle, a trade-in is pretty straightforward. Things get more complicated when you have negative equity. While you can still trade in your vehicle, you’ll either have to come up with the money to pay off your remaining balance or roll it into a new loan.
