Trading in a vehicle is common when upgrading to a new or used model. But what if you still owe money on your current car loan? The process is more complex, but it’s not a dealbreaker. With the right planning, you can still complete a trade-in, even with negative equity.
Here’s what you need to know about how trade-ins work when you have an existing auto loan.
What Happens to Your Existing Loan?
When you trade in a car with an outstanding loan, the dealer essentially takes over the loan payoff process. First, the dealer contacts your lender to determine the exact payoff amount, which includes the remaining balance plus any interest accrued.
Then they calculate the trade-in value of your car. If your car is worth more than the payoff, the difference becomes equity that can be applied to your next purchase. If the car is worth less, you have negative equity, which must be handled before or during the next purchase.
Example 1: You Have Positive Equity
Suppose your payoff amount is $10,000 and the dealer offers $13,000 for your trade-in. That $3,000 in equity can be used as a down payment on your next vehicle. This is the ideal situation.
Example 2: You Have Negative Equity
Now let’s say your payoff is $16,000 and your car is worth only $12,000. You’re $4,000 “upside down.” That $4,000 doesn’t disappear. You’ll need to either:
- Pay the difference in cash
- Roll it into your new loan
Many dealers will allow you to finance the negative equity into your next auto loan. However, this increases your loan amount, monthly payments, and long-term interest.
How Rolling Over Negative Equity Works
If you decide to roll over the $4,000 from your existing loan into a new purchase, and your next car costs $30,000, your new loan will be $34,000 plus taxes and fees. This is convenient, but it deepens your financial commitment.
It’s essential to ask yourself whether this is the right time to upgrade. If your vehicle is still in good condition, you might be better off keeping it until you build equity.
Trade-In Process Step-by-Step
Here’s what to expect when trading in a car with a loan:
- Get your payoff amount from your lender.
- Determine your car’s trade-in value through online appraisal tools or local offers.
- Visit a reputable dealer, such as Carlantic, which helps customers navigate complex trade-ins.
- Negotiate your new car deal, making sure the trade-in value is competitive.
- Review the contract carefully, especially if rolling over negative equity.
You’ll sign over the title, and the dealer will pay off the loan directly to your lender.
Tips for a Smarter Trade-In
- Shop your trade-in at multiple dealerships to get the best offer.
- Time your trade to when your car’s value is highest, such as before a redesign or depreciation spike.
- Avoid unnecessary add-ons that increase your new loan cost.
- Use online calculators to estimate how rolling over equity will affect payments.
If you’re in Canada, some used car dealerships in Nova Scotia specialize in trade-ins with outstanding loans and can help evaluate your options.
FAQs
Can I trade in a car with negative equity?
Yes, but you’ll either need to pay the difference upfront or roll the negative equity into your next loan. Be cautious about increasing your debt load.
Will the dealer handle my existing loan?
Yes. Most dealers will pay off your lender directly and handle the paperwork. Make sure you confirm the payoff amount before finalizing the trade.
Can I trade in my car if I’m behind on payments?
It’s possible, but difficult. You’ll need to bring your loan current before a dealer can take it. Falling behind may also lower your credit score, making new financing harder.