trade car with loanIt’s a common predicament. You have a car that you want to trade for a better car, but you still have an outstanding loan on it.

The Question

The question is — is it possible to trade when you have a car loan that is not yet paid off?

The short answer is yes, you can always trade in that situation.

But it raises another question — how is it possible and is it practical and affordable?

Let’s take a closer look with some examples and get some real answers.

Scenario #1

You have a car you would like to trade but still owe $1000 on your loan. You look up the value of your car on kbb.com or Edmunds.com and find it’s worth $5000. Assuming a dealer will give your the full $5000 trade credit, he agrees to pay off your $1000 loan and give you credit for the remaining $4000 which can be applied as down payment on your new car.

The $4000 is called trade equity or positive equity, or just plain equity — a very good thing.

Regardless of the price of your new car, you now have $4000 that reduces the total amount you need to pay. This is the best situational scenario of all that we’ll discuss here.

Scenario #2

In this scenario, you want to trade but you still owe $6000 and your car is only worth $5000 in trade to a dealer. You are $1000 in the hole — $1000 in negative equity. You are upside down on your loan. Not good, but not necessarily terrible.

How might this situation be handled in a trade deal?

One way, the dealer could agree to pay off your $6000 loan, but you would need $1000 in cash to make up the difference between the $5000 trade credit and the $6000 you owe. Then you could buy any new car you want but you won’t have any down payment credit. In fact, you might need additional cash for a down payment.

Another way, assuming the new car is considerably more expensive than the $1000 negative equity, a dealer and his bank or finance company might let you “roll” the $1000 into a new loan for the new car. Generally, your loan can’t be more than about 110% of the market value of your new car. So, if your new car is valued at $10,000, you might be allowed to roll the $1000 into the new car loan. The downside of this method is that you are immediately upside down with the new loan on the new car, which can be a problem if you want to sell, trade, or if the car is totaled in an accident.

Scenario #3

This is the worst possible scenario. In it, you still owe $12,000 on your old car but it’s only worth about $5000. In this case, you have a whopping $7000 in negative equity. A dealer or finance company cannot possibly roll over this much money into a new car unless that car is valued at about $70,000 or more. The only option in this case is to have $7000 in cash to fully pay off your old loan after the dealer gives you $5000 credit. The old loan must be paid off when you trade or sell. No more monthly payments are possible on the old loan.

Can I Trade If I Buy a Cheaper Car?

This a common misconception. When you have an outstanding loan on your old car and are upside down, it doesn’t matter whether you want to trade for a cheaper car or a more expensive car. Regardless of the cost of the new car, you are still upside down by the same amount and trading is still the same problem. However, if you can pay cash to settle your old loan, buying a cheaper car can lower your monthly payments.

What Can I Do?

Unless your situation is similar to Scenario #1,  you could try to reduce your negative equity by selling your old vehicle yourself and paying off your loan before going to a dealer for a new car. You typically can get more money by selling than by trading.

Otherwise, your best option is to simply keep your old car and keep making monthly payments until you are no longer upside down and in a better position to trade. This might occur before the end of your loan, or not. As time goes on, your loan balance decreases but so does the value of your car.

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