How Does Trading in A Car Work

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If you want to trade in a car that you haven't finished paying for, there are a few additional steps you need to take, such as being aware of all the financial figures involved in the transaction.

It is possible to trade in a car that has an outstanding loan, but it is important to exercise caution and ensure that you are the one in control of the transaction, rather than the dealer.

When trading in a car that you still owe money on, there are two possible situations. The first is having positive equity, which means that the value of your car is more than the amount you still owe on your loan. In this case, you can apply the difference towards the purchase of a new car.

The second situation is having negative equity, which means that the value of your car is less than what you still owe on your loan. This is also known as being "upside-down" or "underwater" on your car loan. If you want to trade in a car with negative equity, you will have to pay the difference between the loan balance and the trade-in value. You can pay this difference with cash, another loan, or by rolling what you owe into a new car loan, although the latter option is not recommended. We will provide guidance on how to handle each of these situations, but first, let's provide a little background information.

How trading in a car works


When you trade in your car at a dealership, the value of the car is deducted from the price of the new car you are purchasing.

If you are trading in a car with an outstanding loan, the dealer will take over the loan and pay it off. The dealer will also handle the paperwork required to transfer the title, which establishes legal ownership of the vehicle.

To trade in a car that has not been fully paid off, you will need to bring several items to the dealership, including information on the loan such as the account number and the amount you still owe. Additionally, you should bring your driver's license, vehicle registration, car keys and any remotes, proof of insurance, and a printout of the trade-in value.

It is important to remember that the price of the new car and the value of the trade-in are both subject to negotiation. To get the best possible deal, you will need to secure a favorable interest rate on your new loan and ensure that you receive a fair price for both the trade-in and the new car. Before heading to the dealership, it can be helpful to use a car loan calculator to estimate these figures and determine what your monthly payment will be for the new car.

Read More: Guide to Financing a Car


Payoff amount and trade-in price

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To trade in a car that you still have an outstanding loan on, you should first contact your auto loan lender and request your payoff amount, which may be slightly higher than your remaining balance.

Next, you should determine the current trade-in value of your car by consulting a pricing guide. Online resources like Kelley Blue Book and Edmunds are useful for this purpose.

After obtaining both figures, you can compare them by subtracting the payoff amount from the car's current trade-in value. While the final trade-in price is open to negotiation, this calculation will provide you with an idea of whether you have positive or negative equity in your current vehicle.

Trading in a car with positive equity

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If you have positive equity in your car, meaning that the car is worth more than the amount you owe on the loan, you can use that equity toward the purchase of your next car. For example, if you owe $5,000 on your car and its trade-in value is $7,000, you have $2,000 of equity that can be applied directly to the new car purchase.

This equity will be deducted from the negotiated price of the new car. Additionally, you can make a down payment to further reduce the loan balance. However, you will still need to secure financing for the remaining purchase price of the car, either through cash or an auto loan.

The value of the trade-in will be listed in the contract for your new car, and it is important to ensure that you receive the full agreed-upon amount that you negotiated.

To ensure that you receive a good price for both your trade-in and your new car, it is best to negotiate each one separately. Refer to the pricing guides available online during your negotiations to help you determine fair market value for both transactions.

Read More: 10 Best Long-Term Investments for 2023


Trading in a car with negative equity

photo: MarketWatch

If you have negative equity on your car loan, it’s typically advisable to delay trading in your car and purchasing a new one until you have paid off your existing loan, or until you have positive equity. However, if you’re struggling to make payments on your car, trading in your vehicle may provide some relief by downsizing to a less expensive or used car. In such a scenario, you’ll need to give the dealer your trade-in and pay the difference for the negative equity.

For instance, if you owe $10,000 on a car with a trade-in value of $9,000, you’ll only be responsible for paying the dealer the $1,000 difference instead of the full loan amount of $10,000.

Be careful though, because the dealer may suggest rolling the negative equity into the loan for your new car. While this may be more convenient, it’s not recommended as it will immediately result in negative equity on the new loan. Furthermore, it will increase the loan amount and the amount of interest you'll have to pay.

In case you require a car, but lack the funds to pay off the negative equity and are struggling to keep up with your current car payments, it may be worth taking the risk. This is especially true if your new loan, obtained from an independent lender or dealer, has a lower interest rate. By downsizing and purchasing a cheaper car, you can make your payments more manageable, even if you include the remaining debt in the new car loan.

When setting up your new loan, it is important to avoid extending the loan term beyond 60 months for a new car or 36 months for a used one. It is also important to note that you will likely receive a better price if you sell your car privately, rather than trading it in.





Source: https://www.nerdwallet.com

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