You can also trade in your unpaid car. Dealers are used to dealing with cars based on liens. But whether it’s a good idea depends on whether you have positive or negative equity. Equity is the difference between the value of something and the amount owed on it. If the value of what you own is more than what you owe, you have positive equity. If you owe more than you are worth, your equity will be negative.
Why vehicle capital is important
It’s often best to pay off or pay off your car loan before selling or trading it in. The main concern is whether the loan has positive or negative equity. If you have negative equity, you’ll need to pay off your car loan before you can trade in your car.
- Positive capital: Positive equity on your car loan means you owe less than the car is worth. In this case, you don’t have to pay off your car loan in full before trading in unless you want to. You can receive enough money from your trade-in to pay off your loan.
- Negative capital: Negative equity is the opposite. If you trade in your car with negative equity, you may have to pay off the remaining loan balance out-of-pocket before trading it in. Alternatively, you can roll the negative equity into a new loan.
Why you shouldn’t trade in a car with negative equity
Proceeding with a trade-in when your equity is negative is usually a bad idea. You will be responsible for repaying the new loan in addition to the remaining balance on your previous loan. Basically, you’re paying for a new car and a car you just sold.
Lenders often “roll over” negative equity by adding the borrowed amount to your new loan balance. You can use the negative equity calculator to get a better idea of what your payments will be. This allows you to see how your old loan affects your new loan.
If a new car is cheap enough, your new car payment may be lower than your old car. However, as a general rule, avoid trading in a car with negative equity.
How to trade in a car that hasn’t been paid off
It’s common to trade in a car before paying it off. With positive equity, you can turn your current car into a down payment. However, even if you have negative equity, you can reduce your losses by trading in your car for something cheaper.
1. Check your current loan
Before trading in your car, be sure to check the terms of your current loan. For example, some loans may include prepayment penalties. This is a fee that your lender will assess if you pay off your loan early. Few lenders charge this fee, but when it does, the fee typically amounts to about 2% of the loan balance.
It’s also important to find out if you owe more than the car is currently worth. If you have negative equity, you’ll need to pay off your loan balance, which could make buying your next car more difficult.
2. Find out the trade-in value of your car
Tools available at Kelley Blue Book (KBB) or Edmunds can help you calculate your car’s value and help you negotiate a trade-in offer. Once you have that number, use it to determine your next car budget and current car equity.
To calculate your equity, take the average trade-in value and subtract the remaining loan amount based on your lender’s estimated repayment amount. If the loan is upside down, a negative number will be displayed.
For example, let’s say your car has a KBB value of $10,000. If you owe $4,500 on your car loan, that means you have $5,500 in equity.
3. Gather the necessary documents
The dealer will want to know basic information about you and your loan, including:
- your driver’s license.
- Proof of income and residence.
- Vehicle title.
- Loan repayment amount and account information.
- car key.
- Vehicle insurance.
4. Go shopping
You’re not required to trade in your current car at the dealership where you’ll buy your next car, but keep in mind that in most states, you’ll pay less in sales tax if you trade in and buy at the same location. The trade-in value is subtracted from the total price of your next car and the result is used to determine your sales tax.
Either way, take the time to see what offers the dealer makes and compare those offers to the results from KBB and Edmunds.
Ideally, you can trade in your car for more than the loan balance. That way, you’ll have extra money to put toward your next car. If not, try to negotiate as close to the remaining amount of your loan as possible to minimize your losses.
5. Make a deal
After purchasing your trade-in option, work with your dealer to complete the process. You should walk away with a check that you can send to your lender to pay for your trade-in.
Some dealers may process payments on your behalf. If you do, please follow up to ensure the funds are transferred.
Any remaining cash can be used as part of the down payment on another vehicle. Then, compare current car loan rates and start shopping for your next car.
Pros and cons of trading in a financed car
Alternatives to car trade-in
If you’re having trouble paying off your loan, trading in your car is unlikely to be your best option.
- Sell it yourself: If you choose to sell privately, you may be able to make more money. Even if you need permission from your lender to sell, a private sale could mean you pay even less for your next car.
- Continue payment: If your payments aren’t significant at the moment, set aside some extra money to help you break even. This way, when you trade in your car, you don’t have to roll your remaining loan balance into your new car loan.
- Refinance your current loan: Your auto loan refinance interest rate may be lower than the interest rate you’re currently paying. This can reduce your total interest payments and potentially avoid negative equity on your loan.
conclusion
Once you understand how much your car is worth compared to the amount you owe, you can start looking for the best trade-in deal. The right solution might be to trade in your car and buy a cheaper option. If you have negative equity, try refinancing instead. This could lower your interest rate and reduce your overall payments.
Most importantly, avoid rolling your remaining loan into a new loan if possible. Work with your lender to sell your car or find other options to avoid taking on additional debt.