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How To Trade in a Car When You’re Still Paying Off the Loan

TLDR

What You Need To Know

  • Yes, you can trade in a car that’s not paid off. The key thing to consider is the difference between what you still owe and the trade-in value of your car
  • If your car has negative equity, trading it in isn’t recommended. Otherwise, you’re paying for a car that you aren’t driving and adding more debt to your debt load
  • If you are thinking of trading in your car, it’s usually a good idea to wait until you’ve owned it for a few years

Contents

When you take out a car loan, you usually hope to pay it off and then continue to drive the car around for a little longer. But sometimes, that isn’t possible. 

Whether it’s because your life or your finances changed, you may need to trade in your car while you’re still paying off the car’s loan. 

If you’re in this position, we can help you figure out when (and if) it makes sense to trade in your car and show you how to squeeze the maximum value out of your trade-in.

Can You Trade in a Car That’s Not Paid Off Yet?

Yes, you can trade in a car that’s not paid off. The key thing to consider is the difference between what you still owe and the trade-in value of your car, which is the car’s equity.

Positive equity

When your car is worth more than you owe in car payments, you have positive equity. And positive equity puts you in a better bargaining position. You can use your equity to swap your car out for another car without paying a dime, use the equity toward the purchase of a more expensive car or use it as a down payment to reduce the size of a new car loan.

Negative equity

When you owe more in car payments than a car is worth on the market, you have negative equity – sometimes referred to as being underwater or upside down on your loan. You can trade in a car with negative equity, but it generally isn’t recommended because you’ll still be on the hook for the remaining car payments plus the car payments on your new car loan.

How Do You Trade in a Car With a Loan?

Trading in a financed car you’re still making payments on is no different from other trade-ins. You take your car to a dealership and apply the car’s value toward a down payment on a new car. To get the best possible deal, you should keep your loan agreement in mind during the trade-in.

Find out the trade-in value of your vehicle

The first item on your to-do list should be to figure out how much your car is worth. You can use vehicle pricing sites like Kelley Blue Book or Edmunds to get an estimate. Many factors will influence your car’s trade-in or resale value, including its overall condition, total mileage and whether it was ever involved in an accident. 

The demand for the make and model of your car will also affect its value. If a car is highly ranked for its dependability, it may retain its value better than a car that is poorly ranked. Your car’s value may also be affected by the auto market. During the pandemic, for example, trade-in values spiked due to supply disruptions and a shortage of new cars to sell.[1]

Shop around for trade-in offers

Now that you know how much your car is worth, start contacting dealerships for trade-in quotes and see if they have a car you want to buy.

Documents needed to trade in a car

Before you head to the dealership, you’ll need to assemble some paperwork. Make sure you bring these docs with you before you go:

  • Loan paperwork
  • Driver’s license
  • Vehicle registration
  • Vehicle title
  • Your keys, key fobs and any remotes
  • Proof of insurance
  • Proof of income and residency

Read the contract carefully and ask questions

Don’t speed through the dealer’s trade-in contract. Take your time to review it and ask questions.

If you have negative equity on your car loan, some dealers will offer to roll the debt into your new car loan – but that’s a risky proposition. Rolling over the loan means you’ll start out underwater on your new vehicle, leaving you on the hook for a larger loan with a potentially higher interest rate.

Close the deal

Once you’ve negotiated your deals on your trade-in and new car, you will either get a check from the lender that covers the value of your trade-in to pay off your old car loan, or your dealer may handle the payoff for you. If they do, follow up with your auto lender to confirm they received the final payment, and you’re in the clear.

When Should You Trade in a Car With an Active Loan?

If you are thinking of trading in your car, it’s usually a good idea to wait until you’ve owned it for a few years. 

A new car can lose as much as 20% of its value (aka depreciate) in its first year and then around 10% of its value every year for the next 4 years.[2] But after 5 years, depreciation tends to slow down. Hopefully, by that time you will have either paid off your loan or built up positive equity in the car. This is also why it’s usually a good idea to avoid an auto loan that lasts 72 months (6 years) or longer.

So, if you plan to trade in your car, try to do it as close to the 5-year mark as possible. But if you’re struggling to make your monthly car payments, you may want to consider refinancing your car loan.

Alternatives to Trading in a Car With Negative Equity

If your car has negative equity, trading it in isn’t recommended. Otherwise, you’re paying for a car that you aren’t driving and adding more debt to your debt load. 

To avoid the negative equity trap, consider these alternatives:

Wait to trade

If you can, hold on to your car for as long as possible. It will give you a chance to either pay off your loan balance or reduce negative equity. 

Sell the car yourself

Instead of trading in your car at a dealership, see if you can sell it yourself. Try a private sale or look for used car buyers who will pay cash for your car. You can put the money you make toward your car loan balance.

Lower your car payment

If you’re struggling to make your monthly car payment, there are different ways to lower it, including refinancing your auto loan or asking your lender to adjust the terms of your loan.

Pay off the negative equity out of pocket

Depending on your car loan balance and interest rate, consider paying off all or part of your negative equity with cash. You can do this with one lump-sum payment or by making extra payments each month. 

Pro tip: Check your loan agreement before you make any extra payment(s) because it may trigger prepayment penalties.

If you need to pay off your loan quickly, try taking advantage of a low-interest personal loan or credit card, but honestly, it will probably be really hard to find a personal loan or card with a lower interest rate than a car loan. 

Is It a Good Idea To Trade in a Car With a Loan?

As a rule of thumb, you’re better off repaying your car loan before you take out a new car loan. 

But if you can’t wait or struggle to make monthly car payments, trading in your car can help, and downsizing to a less expensive car can also help. If you have positive equity, you can put the extra cash toward your new car, allowing you to borrow less and making your monthly payments more affordable.

Are You Ready To Upgrade?

While waiting until your loan is paid off before buying a new car is usually the best way to go, you can trade your car in before that. If you do, make sure you understand your loan agreement and try to get the best possible offer on your trade-in. This way, you can drive away without hitching more debt onto your car.

  1. The New York Times. “Looking to Buy a Used Car in the Pandemic? So Is Everyone Else.” Retrieved August 2022 from https://www.nytimes.com/2020/09/07/business/used-cars-pandemic.html

  2. Experian™. “What Is Depreciation on a Car?” Retrieved August 2022 from https://www.experian.com/blogs/ask-experian/what-is-depreciation-on-a-car/

ICYMI

In Case You Missed It

  1. If you can, hold on to your car for as long as possible. It will give you a chance to either pay off your loan balance or reduce negative equity

  2. Assume your car’s value is lower than the estimate. It’s better to be surprised with a better offer than not have enough for a new car if you’re offered less

  3. If you have negative equity on your car loan, some dealers will offer to roll the debt into your new car loan, which will cause you to start out underwater on your new vehicle

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