How To Trade In A Car You Still Owe On

What happens if my trade-in is worth less than what I owe?

If your trade-in is worth less than the remaining balance on your loan, you have "negative equity," meaning you owe more than the car is currently worth. This difference, often called being "upside down" on your loan, doesn't prevent you from trading in the car, but it does mean you'll need to address that outstanding balance.

Dealing with negative equity requires careful planning. The dealership will assess the value of your trade-in and then determine the remaining balance on your current loan. The difference between these two figures represents the amount you're still responsible for. There are generally three ways to handle this situation: paying the difference out-of-pocket, rolling the negative equity into a new loan, or exploring options to reduce the overall cost. Rolling the negative equity into a new loan means adding the outstanding balance from your old loan onto the loan for your new vehicle. While this allows you to drive away in a new car, it also increases the total amount you owe, potentially leading to higher monthly payments and a longer repayment period, and more interest paid overall. Carefully consider the long-term financial implications before opting for this solution. Paying the difference out-of-pocket obviously requires available cash, but avoids increasing your new loan amount, leading to lower payments and less interest paid in the long run. Before making any decisions, research the true market value of your trade-in using online resources like Kelley Blue Book or Edmunds. Get quotes from multiple dealerships to ensure you're getting the best possible trade-in value. Additionally, explore options for refinancing your existing loan to potentially lower your monthly payments and improve your financial situation before considering a trade-in.

Can I roll the negative equity into my new car loan?

Yes, it's often possible to roll negative equity into a new car loan, but it essentially means you're borrowing more money to cover the remaining balance on your old car loan on top of the purchase price of the new vehicle. This will increase your loan amount, monthly payments, and the total interest you pay over the life of the new loan.

Rolling negative equity works by adding the amount you still owe on your trade-in (the negative equity) to the price of the new car. For example, if your old car is worth $10,000, but you owe $13,000, you have $3,000 in negative equity. If you buy a new car for $25,000, the total loan amount would be $28,000 ($25,000 + $3,000). Lenders are generally more willing to approve this if your credit score is good and the new car's value is significantly higher than the combined loan amount, as this reduces their risk. However, rolling negative equity is generally not recommended if you can avoid it. It puts you in a worse financial position because you're starting your new loan already owing more than the car is worth. This can make it even harder to trade in or sell the car later without repeating the cycle of negative equity. Before opting to roll negative equity, explore alternatives such as paying down the loan on your current car, considering a less expensive new car, or waiting until the value of your current car catches up to the loan balance.

What documents do I need when trading in a car with a loan?

When trading in a car you still owe money on, you'll typically need the vehicle's title (or registration if the title is held by the lienholder), your driver's license or government-issued ID, the vehicle's registration, the loan account information (including your account number and the lender's contact information), and potentially proof of insurance. Having these documents readily available will streamline the trade-in process.

Beyond the basic documents, the dealership will need specific information related to your existing auto loan to facilitate the payoff. This includes the lender's name, address, and phone number, as well as your loan account number. With this information, the dealership can contact the lender directly to ascertain the exact payoff amount. Bear in mind that the payoff amount isn't always the same as your current loan balance due to accrued interest or potential prepayment penalties. Accurate and up-to-date information about your loan will help the dealership process the trade-in more efficiently and avoid any potential delays. Proof of insurance isn't always required, but it's a good idea to bring it along. Some dealerships may want to confirm that you have continuous coverage until the trade-in is finalized. Furthermore, consider gathering any service records or maintenance history for the vehicle. While not strictly required, these records can potentially increase your trade-in value by demonstrating that you've taken good care of the car. They provide added confidence to the dealer about the vehicle's condition.

How do dealerships handle the payoff of my existing loan?

When you trade in a car you still owe on, the dealership essentially acts as an intermediary between you and your lender. They will assess the value of your trade-in, and then contact your lender to determine the exact payoff amount needed to satisfy your existing loan. This payoff amount is then subtracted from the trade-in value to determine the equity (or negative equity) you have in the vehicle.

The dealership handles the loan payoff process directly with your lender to streamline the transaction. After agreeing to the trade-in value and the purchase of your new vehicle, the dealership will obtain a 10-day or 30-day payoff quote from your lender. This quote is the exact amount required to fully satisfy your loan, including any accrued interest. Once the deal is finalized, the dealership will send a check to your lender to pay off the loan on your trade-in vehicle.

Here's a simplified view of how the math works:

It's crucial to understand that if your trade-in value is less than your loan payoff amount (negative equity), the difference will typically be added to the loan for your new vehicle, or you'll need to pay the difference out-of-pocket. Be sure to carefully review the paperwork to understand exactly how your existing loan is being handled and ensure the payoff amount is accurate to avoid future complications.

What are my options if I can't trade in due to negative equity?

If you have negative equity (owe more than your car is worth) and want to trade it in, your primary options are to pay off the difference out-of-pocket, roll the negative equity into a new loan, or delay the trade-in until your car's value increases or you pay down the loan balance.