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How to Trade In Your Car When You Owe Money on It

Trading in a car you haven’t paid off takes only a few extra steps — but be wary if you owe more than the trade-in value.
Nov. 13, 2017
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It’s common to trade in your car when you still have a loan on it — and dealerships are only too happy to help you with this. But before you head to the car lot, you should understand how the process works so you can make the best deal and keep control of the transaction.

If you’re trading in a car you still owe money on, you’re looking at one of these two situations:

  • You have positive equity. If your car is worth more than the amount you owe on your loan, you’re in good shape. This difference is positive equity that you can apply toward the purchase of a new car.
  • You have negative equity. If your car is worth less than what you still owe, you’re “upside-down” on your car loan and you have negative equity. You’ll have to pay the difference between your balance and the trade-in value at the dealership.

» SIGN UP: See your car’s trade-in value

We’ll tell you how to handle each of these situations. But first, a little background.

How trading in a car works

When you trade in a car with a loan, the dealer takes over the loan and pays it off.

When you trade in your car to a dealership, its value is subtracted from the price of the new car.

When you trade in a car with a loan, the dealer takes over the loan and pays it off. The dealer also handles the paperwork, such as the transfer of the title, which establishes legal ownership of the vehicle.

To trade in a car that’s not paid off, take your car to the dealership and bring along the following things:

  • Loan information, including payoff amount and account number.
  • Driver’s license.
  • Vehicle registration.
  • Your vehicle keys and any remotes.
  • Proof of insurance.
  • A printout of your trade-in value.

Keep in mind that both the price of the new car and the value of the trade-in are highly negotiable. To get an overall good deal, you’ll need to get a fair price for both the trade-in and the new car.

Payoff amount and trade-in price

Compare your payoff amount to your car’s trade-in value to see if you have positive or negative equity

If you plan to trade in a car you still owe money on, first contact your auto loan lender and find out your payoff amount — it may be a bit more than the remaining balance.

Then, compare the payoff amount to your car’s current value. You can use NerdWallet’s car value estimator, which uses pricing data from the National Automobile Dealers Association, as well as online pricing guides like Kelley Blue Book and Edmunds. Look specifically for the trade-in price of the car.

Though the final trade-in price is negotiable, you’ll now have a sense of whether you have positive or negative equity in your current vehicle.

Trading in a car with positive equity

The extra money can be applied directly to the car purchase of your next car.

Say you owe $5,000 on your car, and it’s worth $7,000 as a trade-in. You can apply the extra $2,000 directly to the purchase of your next car.

The credit is deducted from the negotiated price, and you’ll need to provide financing — with cash or an auto loan — for any remaining amount. In most cases, credit for the trade-in is included in the contract for your new car.

» COMPARE: Car loans for good, fair and bad credit

The best way to ensure that you get a good price for your trade-in and on your new car is to negotiate each one separately, and try to get the prices listed in the online guides.

Trading in a car with negative equity

If you’re upside-down on your car loan, it’s really better to postpone your new car purchase and trade-in until you pay off the loan — or at least until you have positive equity. But if you’re struggling to make car payments, trading in your vehicle can provide relief. In such a case, you’ll need to give the dealer your trade-in, plus the amount of the negative equity.

Rolling over your debt means that you’ll pay more for your new car loan.

Say you owe $10,000 on a car with a trade-in value of $9,000. Instead of being on the hook for the whole $10,000, the trade-in credit will cover most of the loan and you’ll pay the dealer the $1,000 difference.

The dealer will often suggest rolling the negative equity into the loan for your next car. Though convenient, this is unwise since it will make you upside-down again and means that you’re creating a larger loan amount, and paying more interest.

However, if you need a car but don’t have the money to pay off the negative equity and are having trouble keeping up with your current car payments, it might be worth the risk. If you decide to downsize, by purchasing a cheaper car, your payments may become more manageable even if you roll the remaining debt into the new car loan.

As you set up your new loan, avoid extending your loan term for more than 60 months for a new car or 36 months for a used one. Also know that you’d likely get a better price selling your car privately than trading it in.

» SIGN UP: See your car’s resale value

Final steps

A few weeks after you’ve traded in your car, check that your loan is paid off. The lender should also send documentation in the mail that the loan is settled.

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