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How Does Trading in a Financed Car Work?

Learn how trading in a financed car works, including steps, pros, cons, and tips for handling negative equity and loan payoffs.

By Candida Corkery


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Trading in a financed car can be a practical solution if you're looking to upgrade your vehicle before paying off your current loan. This process involves several steps and considerations, especially if you have negative equity. This article will guide you through the essentials of trading in a financed car, including how to calculate your trade-in value, handle loan payoffs, and navigate the pros and cons.


    1. Understanding Trade-In Value

    Before trading in your financed car, it's crucial to understand its trade-in value. This value is determined by several factors, including the car's age, mileage, condition, and market demand. You can use online tools like Kelley Blue Book or NADAGuides to get an estimate of your car's value. Knowing this value helps you negotiate better with the dealership and ensures you get a fair deal.

    2. Steps to Trade In a Financed Car

    Check Your Car's Value and Loan Balance

    Start by finding out your car's current market value and the remaining balance on your loan. This will help you determine whether you have positive or negative equity.

    Get a Payoff Amount

    Contact your lender to get the payoff amount for your current loan. This figure includes the remaining principal and any interest due.

    Negotiate with the Dealer

    Take your car to the dealership for an appraisal. The dealer will offer a trade-in value based on their assessment. If you agree, the dealer will pay off your existing loan and apply any remaining equity towards your new car purchase.

    Complete the Paperwork

    Ensure all paperwork is completed accurately, including the transfer of the car title and the new loan agreement. Confirm that your old loan is paid off to avoid any future liabilities.

    3. Handling Negative Equity

    Negative equity occurs when you owe more on your car loan than the car's trade-in value. Here are some options to handle negative equity:

    Pay the Difference

    You can pay the difference between your loan balance and the trade-in value in cash.

    Roll Over the Balance

    Alternatively, you can roll over the negative equity into your new car loan. This will increase your new loan amount and monthly payments.

    Wait to Trade-In

    If possible, wait until you have positive equity before trading in your car. This can save you money in the long run.

    4. Pros and Cons of Trading In a Financed Car


    Convenience: The dealership handles most of the paperwork and loan payoff.

    Upgrade: You can upgrade to a newer or more suitable vehicle.

    Positive Equity: If you have positive equity, it can reduce the cost of your new car.


    Negative Equity: Trading in with negative equity can increase your new loan amount.

    Higher Payments: Rolling over negative equity can lead to higher monthly payments.

    Depreciation: New cars depreciate quickly, which can affect your equity position.

    5. Tips for a Smooth Trade-In Process

    Be Honest About Your Loan

    Inform the dealership about your current loan status to facilitate a smoother transaction.

    Research and Prepare

    Use online tools to estimate your car's value and gather all necessary documents, including your loan payoff amount, car title, and registration.

    Negotiate Smartly

    Negotiate each aspect of the deal separately, including the trade-in value, new car price, and loan terms.

    Confirm Loan Payoff

    Ensure that the dealership pays off your old loan promptly and get written confirmation from both the dealer and lender. Trading in a financed car involves several steps and considerations, but with proper preparation and understanding, you can navigate the process smoothly and make an informed decision.

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    Car insurance app on your phone. Drive with Root. You could save hundreds.



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