It’s possible to trade in a car that you still owe money on. However, whether or not you should do so is a different matter. The process can be a bit complicated, and whether it makes sense will depend largely on how much your car is worth and how much you still owe on your loan.
Here’s a closer look at the steps needed to trade in your car and what to consider if you’re still financing it, so you can better decide if you should pay off your car before trading it in.
Key Points
• Trading in a car before it is fully paid off is possible, but it involves additional considerations and steps to ensure a smooth transaction.
• The trade-in value of your current car may be used to pay down the remaining balance on your loan, potentially reducing the amount you owe.
• If the trade-in value is less than the outstanding loan balance, you may need to cover the difference out of pocket or roll it into the new car loan.
• It’s important to review your current car loan terms and any prepayment penalties before deciding to trade in your vehicle.
• As an alternative to trading in your car, you could consider auto loan refinancing. This could potentially get you a lower rate or lower monthly payment.
How Does Trading In Your Car Work?
When trading in a car, what you’re essentially doing is selling your used car to a dealership, which then applies that money to the price of the new or used car that you want to buy.
Generally speaking, the process is pretty simple. First, you’d take your old car into the dealership where you want to purchase a new vehicle and tell them that you’re interested in trading it in. They’ll appraise the car and make an offer. If you accept the offer, you’ll sign over your car’s title and use the proceeds to buy a new car.
The value of a trade-in is usually less than the amount of money you could make through a private sale. After all, the dealership needs to be able to sell the trade-in at a profit. That said, there are steps you can take to increase the value of your car before trading it in.
If you’re still making payments on your car, the dealership may be able to help. They could pay off your old loan and take over the title from your lender.
Do You Need to Pay Off Your Car Before Trading It In?
No, you do not need to pay off your loan before trading in a vehicle. However, you’ll want to think carefully about how much equity you’ve built in your vehicle before you do so.
When you have positive equity built in your vehicle, that means your car is worth more than you owe on your loan. For example, if your car is worth $8,000 and you still have $5,000 to pay off, you have $3,000 worth of equity. If you took that car to a dealer and they offered you $7,000 on a trade-in, they could pay off your $5,000 loan, and offer you $2,000 toward a new car.
On the other hand, if your car is worth less than the amount of money you owe on your loan, you have negative equity. This situation is also known as being upside down on your loan. For example, if you owe $10,000 on your loan and your car is only worth $9,000, you’re underwater to the tune of $1,000.
An underwater loan doesn’t mean that you can’t trade in your car. However, a trade-in at this point likely is not a good option. While a dealership might still be willing to take your vehicle, you’ll need to give the dealer the trade-in, plus the amount of negative equity. In many cases, the dealer will offer to tack on the amount you owe to a new loan, which could mean you’ll start off with a new loan that’s already underwater.
Recommended: How to Sell a Car You Still Have a Loan On
How Soon Can You Trade In Your Car?
Technically, there are no rules about when you can trade in your car, and you can do so at any time. However, you always want to consider how much money you stand to gain or lose at the time of trade-in before doing so.
Cars depreciate swiftly in the first few years you own them. (For reference, car depreciation is the loss in value due to normal wear and tear.) Typically, the value of your car will drop about 20% in the first year of ownership. Depending on the size of your down payment, this could mean that you’ll be underwater on your loan very quickly. You may want to hold off on trading in your car until your equity turns positive.
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Is It Possible to Sell Your Car While Still Making Payments?
While it may be much easier to sell a car for which you already have a title, you can certainly sell one while still making payments. If you have a car loan, you’re on the hook to pay it off, so the same positive and negative equity considerations still apply.
If you have positive equity in your vehicle, you should be able to sell your car for enough money that you can pay off your loan and still pocket some profit. However, if you have negative equity when you sell your car, you’ll still owe money to your lender after the sale. You’ll need to pay off that amount before the title can be signed over to the buyer.
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Pros and Cons of Trading Your Car In Before Paying It Off
If you still have a car loan and you want to trade in your vehicle, carefully weigh the advantages and disadvantages of doing so.
On the one hand, the trade-in process is relatively simple, especially if you have positive equity. It can be much easier than listing a vehicle for sale privately or running around to multiple dealers trying to sell it for the best price. The dealership will also take care of paying off your old loan for you.
That said, if you’re underwater on your loan, you may end up facing complications further down the road. This is especially true if you allow the dealer to roll your negative equity into a new loan. If you agree to this and your car is stolen or totaled, you may have to pay off the balance of your loan yourself without help from insurance. What’s more, you’ll be starting off with a bigger balance, which could increase the amount you pay in interest over the life of the loan.
Here’s an overview of the major pros and cons to consider if you’re weighing the question: ‘Should I trade in my car before I pay it off?’:
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Pros:
• Process can be simple, especially if you have positive equity
• Dealers can take care of paying off your old loan
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Cons:
• If you have negative equity, you may be taking on risk
• You may end up with a bigger, more expensive loan balance
Alternatives to Trading In Your Car
If your monthly auto payments are becoming unmanageable, downsizing to a less expensive vehicle can be one way to make your payments cheaper. However, if you’re upside down on your loan, this might not be the best choice.
Another option is auto loan refinancing, which allows you to pay off your old loan with a new one, hopefully with a lower interest rate or longer term that makes your monthly payments more manageable.
If possible, you might also consider scraping together the funds to pay off your car loan. That way, you don’t have to worry about it when you go to trade in your vehicle.
Another option is to try to sell your car yourself. You may be able to get more for your car if you sell it to a private buyer rather than a dealership, which could help you cover the cost of your old loan. Keep in mind, however, that with this option you won’t have the dealership there to handle paying off your lender and transferring the title.
Recommended: Is Proof of Insurance Needed to Refinance?
The Takeaway
You can trade in your car while you’re still paying it off, but it’s trickier to do so than if you owned your car outright. It’s easiest if you have positive equity in your car that can be used to pay off your loan and provide a little extra toward the purchase of a new vehicle. If you have negative equity, you may want to continue paying off your loan until your equity turns positive.
If you’re looking to make your monthly payments more manageable, another option to consider is refinancing your auto loan. With an auto loan refinance, you could potentially lower your interest rate and/or your monthly payment. Keep in mind, though, that by extending your loan term and lowering your payment, you’ll pay more in interest over the life of the loan.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Is it better to pay off a car loan before trading it in?
Paying off a car loan before trading in can simplify the process and potentially increase your trade-in value. However, it’s not always necessary. Dealers can handle the loan payoff, but if you owe more than the car’s value, you may face negative equity, impacting your next purchase or loan terms.
How long should you pay on a car before trading it in?
It’s generally recommended to wait at least two to three years before trading in a car. This timeframe allows for loan balances to decrease and vehicle depreciation to stabilize, reducing the risk of negative equity. However, timing depends on your financial situation, car value, and loan terms.
Will a dealership buy my car if I still owe money?
Yes, dealerships often buy cars with an outstanding loan balance. They will pay off your remaining loan and apply the car’s trade-in value toward your new purchase. However, if you owe more than the car’s value (negative equity), you may need to pay the difference or roll it into a new loan.
Photo credit: iStock/FG Trade Latin
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