Can You Trade in a Vehicle That Is Not Paid Off?
It is possible to trade in a car that still has an outstanding loan balance. Car dealerships have a procedure for handling trade-in vehicles not paid off.
You should have an understanding how the current loan on your trade-in will affect your new car deal and what to expect from the dealership.
Trade Value Vs. Loan Balance
The biggest factor to consider when you want to trade in a car with a loan is what is the relationship between the car’s trade-in value and the loan balance. If the car is worth $15,000 and the loan is at $10,000, there is $5,000 in equity in the trade that can be applied to the purchase of the new car.
If those numbers are reversed, the owner is “upside down” on her trade-in and may have to put in extra money as a down payment to make up for the negative equity.
When you trade in a car to purchase the new one, the dealership will pay off the loan on the trade-in.
The new loan amount for the new car is calculated as the price of the new car plus any taxes and fees, minus the trade-in appraised value, minus any cash down payment, plus the loan amount on the trade-in that will be paid off. In effect, the loan on the old car is rolled into the new car loan.
Before trading in a car with a loan, it is a good idea to see if there is equity in the trade-in car. The average trade-in value can be found on websites that include Kelley Blue Book or Edmunds. Call the lender for the car loan and get the current loan balance. The results will tell you if you have equity or are upside down.
If the car was purchased with little down payment and within the last couple of years, the car is most likely upside down. Cars depreciate faster than car loans get paid off. If there is two years or less remaining on the car loan, it is probable the trade has equity.
When negotiating with the dealer, the important considerations are the price of the new car, the amount allowed for the trade-in and the interest rate on the new car loan. The rest of the numbers, including the trade loan payoff, will work themselves out.
One technique is to negotiate on the difference in price between the new and old cars. Keep an eye on this difference and do not let the dealership change one to make up for good negotiating on the other.