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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.
November 13, 2017
Auto Loans

Many people trade their old ride in at the dealership on the same day they buy a new car. It’s convenient and helps lower the purchase price. But what if you want to trade in a car — and you owe money on it? You still can, and the dealership will handle the process in-house.

Trading in a car you haven’t paid off is similar to trading in a car you own outright, but there are some special considerations — especially if you owe more than the trade-in price. Keep track of your car’s current value and loan balance to stay in control of the transaction.

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How the trade-in works

As with the usual trade-in process, you’ll need to bring your vehicle, driver’s license, registration information and all your vehicle keys and remotes to the dealership. You’ll also want to bring your current insurance card to prove you have adequate coverage for your new ride. Be aware that your rates may change when you swap vehicles, and you’ll need to call your insurance agent to transfer and extend your coverage as needed. Rules vary by state, but your dealer can likely do this with you during your visit.

You won’t have the title, your lender will. So you’ll need to bring your loan information.

One thing you probably won’t have is the car’s title, which establishes legal ownership — it still belongs to your lender. You’ll need to bring in your loan information, including your account number and your remaining balance. The dealership will contact your lender to assume the loan and take possession of the title and car. It will also handle any other state-specific paperwork necessary to transfer the title.

You don’t have to pay off your loan and receive the title before trading in your car. However, if you owe more than the trade-in value, you’ll still need to cover the difference. Make sure you understand how much you owe and whether you have positive or negative equity before you head to the dealership.

Payoff amount and trade-in price

If you’re thinking of trading in your car, contact your auto loan lender and request your payoff amount. This might differ slightly from your remaining loan balance because of the time it takes for the lender to receive the money. For the most accurate number, ask for the payoff amount as close to your planned trade-in as possible. 

Then compare the payoff amount to your car’s current value. Check online pricing guides such as Kelley Blue Book and Edmunds and look for the trade-in price of the car, since this is the most the dealer will offer. 

If your car is worth less than what you still owe, you have negative equity.

Positive equity: If your car is currently worth more than the remaining balance of your loan, you’re in good shape. This difference is positive equity that you can apply toward the purchase of a new car.

Negative equity: If your car is worth less than your remaining balance, 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.

If you owe less on the car than it’s worth

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.

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

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 check the prices against online guides.

If you aren’t buying a new car and you’d like a cash payout, you can simply sell the dealership your vehicle. The dealership may write you a check the same day or send you one in the mail. If there will be a delay, get the exact amount in writing so you’ll be sure to receive full payment.

If you owe more on the car than it’s worth

If possible, it’s best to drive through the loan, making payments until you’re back to having positive equity in the car or own it outright. But if you’re drowning in payments, trading in your vehicle can provide relief. In such cases, you’ll need to pay the dealer for your trade-in, not the other way around.

You can make a cash payment to the dealer for the negative equity amount, not the whole 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, you can pay only the $1,000 difference when you trade the car in.

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

The dealer will often suggest rolling this negative equity into the loan for your next car. Though convenient, this is a risky move — you’ll pay more for your new car and may soon be upside down again.

However, if you can no longer afford your payments — or the difference between your trade-in value and loan balance — and you can’t go without a car, it might be worth the risk. Your payments may become more manageable even if you roll the remaining debt into the new car loan, as long as it’s for a much less expensive vehicle.

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. But then you’d also have to coordinate with the buyer and your lender to ensure the loan is paid off.

» SIGN UP: See your car’s resale value

Final steps

Once you’ve traded in your car, check that your loan is paid off seven to 10 days later. The lender should also send a formal document in the mail, which you should be sure to keep.

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