9 months ago

Things to Consider When Trading in a Car With a Loan

car trade in with a loan

If you have a car that has no lease on it or if you have cleared the lease or if you bought it for cash, the process is rather simple. You hand the car over to the dealership and they estimate the value. If you like the deal, you give them the keys and drive off in the shiny new ride.

However, what if you have a leased car? What if you still have to pay for the car and your installments are still remaining? The good news is that you can still trade in the car. 

How does that work? We’ll be examining that in this post. 

Let’s see how to trade in a car that is not paid off.

Two Cases of Trading In Car with a Loan

But how does trading in a car work? We need to understand the two scenarios that can arise when a leased car is traded in before we can answer this.

  • First, the dealer gives you an estimate of the value of the car that is more than the amount of loan you still owe against the car. This is called positive equity. 
  • Second, the value of the car offered by the dealer is less than what you still owe against it. This situation is called negative equity. 

Let’s examine the effects of having positive or negative equity on your car.

Trading in a Car With Positive Equity

Say you have a car against which you owe $10,000 to the lender. You decide to change it and go to a dealer. After bargaining and negotiation, the dealer offers you a final price of $12,000 for your car. 

In such a case, the loan will be shifted to the dealer. They will add the surplus of $2,000 to the downpayment of your next car.

This is a pretty straightforward process. Now, let’s see how to trade in a car with negative equity. 

Trading In a Car with Negative Equity 

Suppose, you have a car against which you owe the lender $10,000. You go to a dealer to trade it in and the dealer inspects the car and offers you $8,000 for it. 

Such a case is known as being upside down in a car loan. 

Now what happens is, the dealer adjusts the $8,000 against the price of the new car you are buying, and the remaining $2,000 that you owe the lender is rolled over into the price of the new car. 

Such a situation arises mostly when someone has bought a car with zero down payments and has opted for a 5 or 7-year installment plan. 

In such a case, the car depreciates faster than the loan is paid and the high-interest rate means you almost always owe the bank more than the value of the car.

In short, if you trade in a car with negative equity, you’ll be paying for the new car you’ve purchased as well as for the one you no longer own.

Okay, so that is how a financed car trade-in works. But what are the things you need to take care of before trading in a financed car?

Things to Consider When Trading in a Financed Car 

There are a few important things that you need to be fully aware of before you go to trade in a car that is still not fully paid. 

Here are four of the most important things that you need to consider: 

  1. As in any other trade, you need to do your research beforehand. You need to know the vehicle better than anyone. Make sure of the model year and trim level. Make a list of the optional features or upgrades your car has. 

Go to an online marketplace or a dealership to see what comparable cars are changing hands for. 

You also need to have a record of the repair and maintenance work done on the car. If there’s an issue in the car, it is good to have it resolved before trading it in.

  1. Be prepared for the equity situation. If you have negative equity on the car, you’ll have to pay more for the new car per month and the interest rates for the loan carried forward from the old car will also be higher. 

You should fully grasp the concept of trading in a car with negative equity before you go further to negotiate the best deal.

  1. When you do the deal, you should do it calmly. The contract is the most important thing in the whole process. Don’t just sign it. Take it home, and study it in detail. Decipher the legal language and only commit to it if you think that the terms and conditions of the document are acceptable to you.
  2. Never agree to a verbal deal. Always ask the dealer to give you their deal in writing.

So those are the details of how trading in a leased car that is yet not fully paid off works. But is it a good decision to do so? Should you really trade in a car that has a loan against it? 

Does it Make Sense to Trade In a Car with a Loan? 

There are cases when it makes sense and there are ones where it does not. Let’s have a detailed look at both cases. 

Cases When it is a Good Idea to Trade In a Financed Car

  • If the car is an expensive one to own and operate, you should trade it in, even if it has negative equity on it. The extra money you’ll have to pay as the loan payments will be compensated in the form of fewer gas costs, lower maintenance, and zero repair bills. 
  • If the car is no longer useful for you, don’t hold on to it. Let’s say you were assigned a field job and had to buy an SUV. Now you’re back in town, you don’t need to drive around in a gas-guzzling vehicle. 
  • If your car has positive equity, it is always the better option to trade it in and get a new one. You have nothing to lose.

Cases When You Should  Hold On to a Financed Car 

  • If the car is brand new, NEVER go for a trade-in. This is because the moment you drive a new car out of the dealership, it loses up to 14% of its value right then and there. So keep driving it unless you think it has made up for the depreciation. 
  • If you can fund the new car without the trade-in, do not trade in the car. You can sell it later for a better price. Trade-ins don’t usually offer the best price on a vehicle.
  • If the car has been in an accident but drives fine, don’t trade in. Such cars go for a substantially lower price. As long as it is safe to drive and has no big issues, just hold on to it. 
  • If a new generation for the car you have has just been launched, don’t trade in your car. Keep it with you for some time. Older generations of a model lose their value when a new generation is announced. Hold on to it for a while. 

Now, there are some things you need to be aware of to get the best value on the trade-in.

Things that Can Get You a Better Trade-In Value on A Car 

Trading things is an art. If you want to get the best price on a car at the time of trade-in, here are the things that you need to make sure of: 

  • Make sure that the car is washed and serviced. Get the interior and exterior cleaned. A dirty car won’t get you the top dollar. 
  • The second thing that you need to take care of is the mechanical condition of the car. Make sure no “Check Engine” or other warning lines have gone off. If there is one, get it fixed. 
  • Get all the paperwork from the proof of ownership to the record of the service, repair, and maintenance work done on the car in order.
  • Bring all the things that came with the car with you at the time of the trade-in. This includes everything from the spare wheel to the jack and wheel wrenches.

Frequently Asked Questions

Can you trade in a leased car?

Yes. You can trade in a leased car. The amount you owe minus the value of the car will be rolled over to the payment of the new car you are getting.

Can you trade in a financed car?

Yes. A car that is financed can be traded in just like a car bought in cash.

Can you trade in a car that’s not paid off?

Yes. You can trade in a car that has not yet been fully paid off.

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