Trading in a Car with a Loan: Everything You Need to Know

You can trade in almost any car for a new set of wheels, including a car with a loan. A car with a loan is an automobile that you’re still paying off in installments.

Want to trade in your car before the loan is paid off? It’s possible, but there are a few things you should consider before you take this option.

In this guide, we’ll explain everything you need to know about trading in a vehicle that’s still being paid off and answer some frequently asked questions.

Can I Trade in a Car I’m Still Paying Off?

Yes, you can trade in a car you’re still paying off. However, your car loan doesn’t disappear if you trade in your car.

When you trade in a financed vehicle, your car’s trade-in value gets applied as a credit towards your next loan. Depending on the remaining loan balance, this credit might cover the remaining amount you owe. If it doesn’t, your dealer will roll over your loan, combining the deficit with the amount you owe on your new car.

Consolidating what you owe into a single, new loan helps you manage your payments better. But as you might have guessed, the new loan will probably 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 if trading in your car is the right decision right now.

First, it’s important to understand that taking out another car loan could 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 lead to a much higher monthly payment, and potentially, higher interest rates over the lifetime of the loan.

Another thing to consider is that getting more into debt means you might have negative equity in your vehicle. This happens when you owe more on the car than what it’s worth. Having negative equity, also called being “upside down,” makes it much harder 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 straightforward, 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:

  1. 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 figure out what the monthly payment will be, based on your down payment, credit score, and loan period.
  2. 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 will need to take your car to the dealership to get a trade in offer in-person.
  3. Bring paperwork to the dealership. When you trade in a financed vehicle, the dealer will need to see some paperwork to verify the ownership and your loan information. Here is 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 print-out of your trade-in value (if you got one)
  4. The dealership contacts your lender: In most cases, the dealership 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 get rolled over into your next car loan and added to the balance.
  5. The dealership handles the paperwork: The dealership 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 you leave the dealership.
  6. 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 due date.

What Happens to the Vehicle I Trade In?

It’s up to the dealer to decide what happens to your car after you trade it in. But in most cases, the dealer may sell it to another customer or auction it off to another dealership.

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 potentially be beneficial.

  • Your car has high ownership costs: If your car gets poor gas mileage or often needs expensive repairs, it can be financially smart to trade it in. Choosing a car that’s cheaper to own can help you save money in the long run.
  • The dealership has great incentives: Dealers often have promotions that make trading in your vehicle more attractive. For example, you might be able to get a higher trade-in value during end-of-year sales when the dealer clears out old stock and makes room for new inventory.
  • Lower sales tax requirements: In some states, if you trade in your vehicle and purchase 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 might 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 might still be upside down, where you owe more than the car is worth. In this case, it’s best to wait until the loan balance is lower before you trade in the car. Otherwise, you could take a major financial hit.
  • You’ll get penalized. Some lenders charge prepayment penalties for paying off loans before the end of the loan period. These extra charges, spelled out in the car loan terms, help offset the interest your lender won’t get when you prepay. These penalties can be so steep 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, like Facebook Marketplace, eBay Motors, and Craigslist.

The price you’ll receive for your car through a private sale is usually more than its trade-in value. That’s because the dealer wants to make money on your vehicle when you trade it in. If you’re still paying off your car, you can use the money you make from your private sale to pay off your loan and transfer the clean title to the new owner.

If the money you make from your private sale doesn’t cover your loan balance, speak to your lender. They might be able to transfer your car loan to a personal loan or suggest another good option for repaying your debt.

Since you don’t have a dealer working on your behalf, you’ll have to handle all the paperwork required in a private sale. It will involve getting a clean title from your lender and writing up a bill of sale to give to the new owner.

You will also need to advertise the car, screen prospective buyers, schedule test drives, and field questions about the car’s history.

While selling a car privately is more work for you, it’s often worth the higher payout, especially if you need extra money to pay off your loan.

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