Something we’ve heard people say many times over the years is “I want to trade in my car, but it’s not paid off.” People often think they will not be able to trade in their vehicle if they are still making payments on the auto loan. If you’ve been wondering how you can trade in a car you haven’t paid off, the good news is that most dealerships will not mind at all and will still be happy to take your vehicle. The bad news is that it might not be the wisest decision on your part. Consider the following six points in order to figure out if trading in your car is the right move for you to make in this situation.
1. Can I Trade In My Car if it isn’t Paid Off?
The short answer to this question is yes. Car dealerships do this all the time for customers and have made the process very easy and smooth, so much so that they can get it done in a surprisingly short amount of time, oftentimes within the space of a single day if you already know the next car you want to buy. You don’t have to go through all the bother of paying off the loan yourself first and waiting for the title to arrive from your lender – the dealership will take care of all those details for you. They will work directly with your lender to pay the loan off. You don’t even have to give your lender advance notice that you’re planning to sell the car because dealership takes on all the legal legwork for you. If the trade-in offer is more than you owe on your loan, the money left over will then be applied toward the purchase of your next car. If the trade-in offer is less than what you owe, the remaining balance can be rolled into your financing contract for the car you’re purchasing. Either way, be sure to verify that the dealership has paid off your current loan within 10 days to avoid your lender thinking you’ve lapsed on your car payments. After the dealership receives the title to the vehicle, they’re free to do what they want with the car, such as get it ready for re-sale on their lot or sell it off to a wholesale auction. Keep in mind, however, that just because a dealership makes it easy for you to trade in a car that isn’t yet paid off doesn’t mean this is what you should do. Answering that question depends on a variety of factors that we’ll discuss further below.
2. Find Out How Much You Still Owe on Your Current Loan
One thing you should always do when you’re considering trading in a car you haven’t yet paid off is find out for sure exactly how much you still owe on the loan. You need to know this in order to see how the trade-in offer at a dealership compares to what you still owe. In an ideal scenario, what you still owe would be less than the trade-in offers you receive, but it also might not work out that way, which is a common situation we’ll deal with a bit further on in this article. Finding out how much you still owe on a vehicle is easy to do – you just have to call up your lender and ask. However, the figure you’re looking for isn’t necessarily as simple as the remaining outstanding balance on your loan, which is something you could easily look up online or from your last loan statement. The reason for this is because the interest charges on your loan keep accruing on a daily basis, so what you want to get is a 10-day pay-off amount, which lets you know exactly how much you still owe that includes all the interest that will accrue for the next 10 days. After those 10 days, you’d want to get a new pay-off amount since it keeps changing.
3. Know What Your Car is Worth Before Visiting a Dealership
Knowing what you owe is a key piece of information that helps you understand any trade-in offer compared to what you still owe on the vehicle. But that’s just one part of the equation, you also want to know if the trade-in offer is a good one relative to what your car is worth. There are many quick ways to determine the trade in value of your car. You use Driveo’s proprietary method to determine what your car is worth which will guide you through the process step-by-step. You can also go online and see what kinds of prices similar vehicles are listed for in your area, which is always a good idea in order to better understand your local market. You can also visit one or both of two popular sites many people use to figure out what their car is worth – the Kelly Blue Book Value or the Edmunds True Market Value. Each site will give you an idea of what you might expect to get for your car as a trade-in at a dealership or if you were to sell it on your own privately. This can be a real eye-opener. You’ll probably be shocked at how low the trade-in value is for your car, but it’s just the reality of how dealerships make money on used cars. They tend to base their offers on the wholesale value of the vehicle. If it’s a great car, they may then recondition it and mark it up to a higher retail price in order to make a profit on it. Otherwise, they’ll sell it at a wholesale auction, hoping again to make at least a small profit on it, which helps explain why they offered so little for it as a trade-in. The numbers may feel a bit depressing to you, but it’s better to know all of this up-front than to experience a rude awakening when visiting a dealership.
4. Make Sure You Understand the Trade-In Offer
If you’re still thinking you want to move forward with trading in your car that’s not paid off, keep your eyes open when the dealership makes you a trade-in offer. Some dealerships have a way of making you think that they’re going to pay off your whole loan no matter how much you owe and you have nothing more to worry about. If what you still owe on your loan is less than the trade-in offer, then this is true. The problem is that some dealerships don’t let you know up-front what’s really going on if you owe more on the loan than the trade-in offer. If your car is worth less than what you owe, this is called negative equity or being underwater or upside-down on your car loan. If you owe $12,000 on your car, but the dealership is only offering you $9,000 for it as a trade-in, that $3,000 difference is going to be added into the financing terms of your new car loan. This is where many people are taken advantage of because now you’re paying for two vehicles, one of which you don’t even own anymore, and you might not even realize this is what is happening! In some cases, the $3,000 of negative equity is deducted from your down payment, or it’s added into your new loan’s principal balance. Either way, you’re going to end up paying it, along with interest over the life of the new financing, and if your interest rate is a high one, this can end up being a big hit over time. Don’t sign off on the new financing contract until you know for sure what the terms are and how any negative equity is being included.
Also keep in mind that you don’t have to settle for the first trade-in offer you receive from the first dealership you visit. Do yourself a favor and shop around! You may get a much better offer at one dealership than another. Yes, this takes time, but it’s worth it if it helps address a negative equity situation.
Another thing to keep in mind is to negotiate the price of the new car you want and the value of your trade-in separately. If the dealership is offering lots of great incentives, this could help you deal with negative equity and/or better stomach a low trade-in offer.
5. What to do When You Have Negative Equity
If you follow the advice we’ve presented so far in this article, you should be able to easily figure out up-front whether or not you have negative equity in your vehicle by comparing what you owe to your car’s value. If it’s clear that you are underwater on your car loan, what should you do? This depends to some extent on how much negative equity you’re facing. If it’s less than a thousand dollars, you might be willing to just live with it being rolled into your next loan. But you might also consider selling your car privately. Why? As you know from checking out what your car is worth, you usually (not always, but usually) stand a better chance of getting more for your car in a private sale – and that difference might be enough to take care of a small negative equity amount. Of course, selling your car privately comes with its own headaches and hassles. For more information about how to decide between trading in or selling, see our article where we compare selling your car privately versus trading your car in.
If your negative equity is substantially more than $1,000, it’s less realistic to think you’ll be able to make that difference up even with a private sale. You can have your negative equity rolled into your next car loan, but think carefully before you do this. Many people get trapped in a cycle of ever-increasing car debt if they end up doing this several times. The debt snowballs and become unmanageable over time. You can avoid that debt-trap if you have the flexibility to wait a while longer before buying your next car. The idea is to put off a new purchase long enough that you can make enough payments on your loan to get into the positive equity zone, meaning your car is worth more than what you still owe. If you do roll negative equity into a new loan, try to keep the term of the loan as short as you can possibly handle so you can reach positive equity in your new car as quickly as possible.
Finally, also keep in mind that even though the dealership says they’re taking care of everything, it’s up to you to verify that your current loan has in fact been paid off. After all, you are the customer of the lender, not the dealership where you’re trading in the car. Some people have had their credit damaged when they thought a dealership was paying off their loan but it didn’t happen within the proper time-frame.
6. Remember to Cancel All Your After-Market Products/Services
When you bought your car, did you purchase GAP insurance? If so, make sure you cancel it! This is one of the most common mistakes people make when selling or trading in a vehicle. The full cost of the GAP insurance was determined up-front for the whole life of the loan, and that full cost was included in your financing contract. If you’re trading in your car before the end of the car loan, not only should your GAP insurance be canceled, but you should also receive a prorated refund of the unused portion! Go back to your original finance contract and read all the fine print to find a clause that explains how to handle cancellation and getting a refund. But GAP insurance isn’t the only thing you might have added onto your finance contract when you bought your car. Read your contract carefully to see if you bought things like a service contract, extended warranty, theft protection, appearance protection and so on. If the full cost of these add-ons were rolled into your finance contract, you should be able to get pro-rated refunds when you cancel them.
If you’ve been wondering, can you trade in a car before you pay it off? The more important question to ask is whether or not you should trade in a car that isn’t paid off. What you want to avoid is getting trapped in a situation where you keep rolling over negative equity with each new vehicle purchase, resulting in a ballooning debt that becomes unmanageable. If you’re just on the edge of being underwater on your loan, consider selling your car to Driveo. We routinely beat dealership trade-in offers, and often by at least $1,000, which can help you avoid rolling over negative equity into your new loan. And we make the process of selling your car every bit as easy as any new car dealership, which means none of the stress or headaches you go through when you try to sell privately on your own. Visit our website to get an online quote in minutes that will be good for 30 days and find out just how easy it is to cruise in and cash out at Driveo!