Trading in a car with a loan — is it possible?
Yes, it is possible to trade in a car with a loan balance. However, there are some things to keep in mind. Because payments are still being made, there is “negative equity” in the vehicle. This means if the trade-in value of the vehicle is less than the loan amount you owe, you would owe the dealership money to cover the difference.
At Credit Union of Southern California (CU SoCal), we make financing a new vehicle easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our auto loans, home equity lines of credit, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Read on to learn more about trading in a car with a loan.
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Understanding your car's equity
These are the two most important terms to know:
- Positive Equity. This is when the car you’re trading in is worth more than the remaining loan balance.
- Negative Equity. This is when the car you’re trading in is worth less than the remaining loan balance.
How does trading in a financed car work?
When trading in a car with a loan balance, the car dealership that you are purchasing the new vehicle from would take over the loan, essentially buying the car from you and paying off the loan.
When considering trading in a car with a loan, the most important thing to be aware of is the trade-in value of your vehicle. If the vehicle is worth more than the loan amount you owe, that’s “positive equity.” If you have positive equity the dealership would owe you money, which you could put toward the purchase of the new vehicle.
If the trade-in value of your car is less than the amount you owe on the loan, this is called “negative equity.” If you are trading in a car with a loan balance and owe more on the car loan than the car is worth, you must pay the dealer the difference between the value of the car and the loan amount. If you're vehicle has negative equity you can still trade it in, but it could cost you thousands of dollars to do so.
How to trade in a car with negative equity
If you have negative equity and still want to trade in your car, here are the options:
- Roll the negative equity into new loan. Rather than paying the dealer the difference, you can finance the negative equity amount into the new loan. Remember, you’ll pay interest on a larger loan amount.
- Pay the difference between the trade-in value and balance. If you have the cash, you’ll save money on loan interest if you pay cash for the difference.
Is trading in a financed car with negative equity a good idea?
Trading in a car with a loan balance comes with the possibility of negative equity, which means you could end up paying thousands of dollars just to drive a different car.
However, if you your car or truck is a particularly a popular model and you are toward the end of your loan, the amount of negative equity may not be as large.
Each car owner’s situation will be different based on the make and model of their vehicle and how much is still owed on the loan. Financially, it’s not a good idea to trade in a car that has negative equity. Unless you really need a new car, it's better to wait until the car is paid off.
How to trade in a financed car
Look up the value of your financed vehicle. Before you visit a car dealer, it’s smart to find out approximately how much your car is worth. Car valuation websites include:
Kelley Blue Book,
Edmunds, and
Consumer Reports.
Know how much you owe. Don’t just rely on your last billing statement. Call the loan company and ask for the current loan balance. Keep in mind that this process is only for people who have purchased a vehicle. If you are driving a leased vehicle there are different requirements for
trading in a leased car,
selling a leased car, or
getting out of a car lease.
Create a budget. If you’ve done the numbers and do indeed have negative equity, you may need to start saving money to make up the difference. In that case, creating a budget will help you cut back on unnecessary spending so you can reach your target amount.
Gather required documents. As with any vehicle purchase, there are documents you’ll need to provide the dealer, including your license and proof of auto insurance. When you’re trading in a car with a loan, you’ll need to provide your current loan information, including the name of the loan company and the loan balance.
Shop around for different trade-in offers. Visit several dealerships to see which will give you the most for your car.
Close the deal. Once you’ve found the price you want for your current car and the new vehicle you want, you’ll need financing. CU SoCal offers competitive
auto loans. We can also help you
get a car loan with bad credit.
Alternatives to trading in your financed car
Trading in a car you owe money on is a big decision. Before you do a trade-in, carefully consider the reasons why you want to do so and determine how much money you are willing to spend. Do you need a larger vehicle for your growing family? A more fuel-efficient car for a longer commute to work? Or do you just not like the car?
If you absolutely must get another vehicle, you may also consider selling the car privately or making additional loan payments and paying the loan off sooner.
How soon can you trade in a financed car?
While it's possible to trade in a financed vehicle as soon as you have an offer, it's generally better to wait at least a year or more so that the vehicle has more positive equity.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including car loans, mortgages, Home Equity Loans, HELOCs, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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