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Trading in a Financed Car
January 17, 2025
If you still owe money on your car but are eager to buy a new car, this article is for you. In a situation like yours, trading in a financed car might be a good option; however, it doesn’t mean you get rid of the hook for your current loan.
Here are a few points to consider, like how much equity you have on your current car and how much you can afford.
How to Trade in My Financed Car?
There are many reasons why individuals want to trade in their financed cars before they’re totally paid off. Maybe they simply want to upgrade to a better model, or they want to buy a car that comes with incentives and rebates.
Whatever the reason, you don’t have to wait until you’ve paid off your loan on your current vehicle. For trading in a financed vehicle, follow these below steps:
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1. Check your car’s value and your loan balance
Before trading in a financed car, the first step is to consider how much your car is worth. There are some free online tools, like Car and Driver’s Car Value Estimator, to help you get an estimate on your car’s value.
The next step is to figure out how much you owe on your loan. To know this, you can ask your lender for a payoff amount document to calculate the amount of the debt, helping you find out whether you have positive or negative equity.
Positive equity means your car is worth more than what you owe, and negative equity means the remaining balance on your car loan is higher than the current market value of your vehicle. In other words, the car is worth less than what you still owe on the loan.
If you have positive equity, trading in a financed car gives you money to apply to buying the next car, helping reduce your monthly payment.
If you have negative equity, you still have to pay the loan. You can either pay all the money you owe now or add it to a new car loan and pay it off over time.
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2. Create a new budget
Before trading in a financed vehicle, you need to know how much you can spend on buying the next car. Always remember, the budget you set for purchasing your next car will likely impact your current loan balance, especially in terms of whether you have positive or negative equity.
If you have positive equity, you can consider more money to put toward the purchase of the new car; if you have negative equity, you need to consider buying a vehicle at the lower end of your budget.
3. Prepare for Trading-In
Before heading to the dealership, collect all the maintenance, repair, and warranty records; make sure the user manuals are in the glove box and all personal items are removed from the car.
You may need to consider minor cosmetic repair to maximize your car's trade-in value.
4. Car Shopping
Now, it's time to shop around. When you find your desired car, let the salesperson know you'd like to trade in your current car. Based on the condition of the current vehicle and the current market rate, they give you an offer. Here is where your previous research comes in handy and gives you the power to negotiate the value of your current trade-in car as well as the next desired car price.
If you got a pre-approved auto loan, bring along the letter when visiting dealerships. If the dealer works with their own lenders, they may help you get a loan with a lower interest rate.
5. Complete the Paperwork
Once you and the dealer agree on the price, you'll need to fill out paperwork for both the trade-in car and the new car. Furthermore, if you get a new loan from the dealership, you'll have to fill out the extra papers. Before submitting, review them carefully and make sure the loan payments exactly match what you're expecting to pay.
Confirm the Auto Loan Is Paid Off
The dealer wants to ensure your previous auto loan is paid off, happening when the balance is rolled over into the new loan or you pay it off in full.
A piece of advice:
When you've paid off a loan or debt, it's always a good idea to contact your lender to confirm that they've received your final payment and that you no longer owe any money.
Read More: Certified Used Cars
Can I Trade in My Financed Car with Negative Equity?
Trading in a financed car with negative equity can be challenging and definitely more expensive.
However, negative equity can't stop you from trading in a financed car. Here are some options you have:
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1. Wait to Purchase a New Car
You are allowed to trade in a financed vehicle even with negative equity. However, you need to pay off the difference before the dealership will accept your trade-in.
If you don't want to add that extra balance to your new loan, think about waiting until you get a positive equity on your current vehicle.
2. Provide a Higher Down Payment
If you own extra cash, paying more down payment can be absolutely beneficial, helping you lower your monthly car payments, especially when you have positive equity.
The more money you can put aside in a down payment, the lower your interest rate and monthly payment will be.
3. Take Advantage of Incentives
Many dealerships might offer some considerable incentives for customers who want to trade in their vehicles. For instance, you may get a higher trade-in value if you purchase a new car and trade in your current car from the same dealership on the same day.
Our advice is that before heading to shopping, contact a few dealerships in your neighborhood and ask whether they offer trade-in deals.
4. Pay More Monthly Payment for Your Loan
If you have negative equity and still are willing to trade in your car, you should expect a higher monthly payment. If you do not qualify for a lower interest rate, think about paying more on your loan each month or each quarter.
For instance, if your monthly payment is around $350, consider if you can pay an additional $100 every few months. Any extra money you pay for paying your debt comes off your balance rather than interest, which helps you pay down your loan faster.
5. Extend Your Auto Loan
Trading in a financed vehicle with negative equity? One option is to extend the length of your loan. For instance, while you may pay more interest on an 8-year loan compared to a 4-year loan, the longer loan results in lower monthly payments. If you have this chance, it could make your payments more affordable.
Read More: The Future of the Car Market in Canada
Tips for Trading in a Financed Vehicle
- Shop around: When trading in a financed car, you can shop around for dealerships. Some may offer better trade-in values, so it's always worth it to get a few offers.
- Selling the car yourself: Usually, you can get more money if you can sell your car through a private party sale. Therefore, if you're looking for more money and don't mind the legwork, a private party sale can be a great option.
- Knowing your car value before going shopping: Before heading to shop, do some research to understand what realistically you can get and then use this information to negotiate with the dealer.
- Time your trade-in: Trade in your car when its value is more than the money you still owe. This extra money helps pay more for a new car.
PROS AND CONS OF TRADING IN A FINANCED CAR
Trading in a financed car has both advantages and disadvantages:
Pros:
- Convenience: Trading in a car is usually more convenient and less time-consuming than selling it privately.
- Lower monthly payments: If you have positive equity, the trade-in value can help reduce the amount you need to finance, leading to lower monthly payments on your new car loan.
- Tax savings: In many cases, the trade-in value can be subtracted from the new car's price before calculating sales tax, reducing the amount of tax you'll owe.
Cons:
- Lower trade-in value: Trade-in offers from dealerships are typically lower than what you could get from selling the car privately.
- Risk of negative equity: If you have negative equity, you'll need to pay off the remaining balance on your loan, or it could be rolled into the new loan, increasing your total debt.
- Potential for higher interest rates: Taking on more debt with a new car loan could lead to higher interest rates, especially if you have a history of negative equity or a lower credit score.
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Common Mistakes and Red Flags
Even though trading in a financed car can be convenient, there are some costly mistakes to avoid if you want to protect your budget and credit. When someone asks, “can you trade in a financed vehicle?” the real question should be “how do I do it without digging a deeper debt hole?”
- Focusing only on the monthly payment.
Many buyers rush into trading in a car with a loan because a dealer offers a “lower monthly payment,” but that often comes from stretching the term, not lowering the price. A long loan can keep you upside down for years and make it harder the next time you ask, “how to trade in my car for a new one.” - Rolling negative equity into the new loan without a plan.
If you are trading in a financed vehicle and owe more than the car is worth, that “extra” amount often gets added to the new loan. This is especially risky if you are trading in my brand new car very early, because new vehicles lose value quickly and you can start the next loan already in negative equity. - Trading too soon, before you understand your equity.
Drivers often ask, “how soon can you trade in a financed car?” or “can I trade in my financed car after 1 year?” The honest answer is: you can, but it may not be smart if your payoff amount is still much higher than the car’s value. Waiting until you have at least a little positive equity usually makes the pros and cons of trading in a financed car much more favorable. - Not comparing trade-in vs. private sale.
Dealerships typically offer less than you might get from selling privately, especially if your car is in good condition. Before saying “yes” to trading in a financed car at the first dealer you visit, compare a realistic private-sale price (minus the extra time and effort) to the trade-in offer and any tax savings in your province. - Ignoring total cost of the new loan.
When people say, “can I trade in my financed car to lower my payment?”, they sometimes forget to look at total interest over the full term. A lower payment can still mean paying thousands more in interest if the loan is larger or longer than necessary.
Note:
If several of these red flags apply to your situation, consider waiting, paying extra toward your current loan, or choosing a less expensive vehicle before trading in a car with a loan.
When Is the Right Time to Trade?
- When trading make sense?
Trading in a financed car can be a good move when you have positive equity, your current vehicle no longer fits your needs, or you can switch into a more reliable, efficient car without increasing your total debt too much. In this case, the pros and cons of trading in a financed car often tilt toward “yes,” especially if the dealer offers fair value and reasonable rates. - When waiting is usually smarter?
If you are asking “can I trade in my financed car after 1 year?” because the payment feels too high, there is a good chance you are still in negative equity. In that situation, a better strategy than trading in my brand new car immediately might be to make extra payments, refinance for a shorter term if possible, or drive the car a bit longer until you are closer to break even. - Quick decision checklist
Before deciding how to trade in my car for a new one, ask yourselves these questions:- Do I have positive, neutral, or negative equity?
- Will the new loan be smaller, similar, or bigger than my current one?
- Will this change actually improve my monthly budget and long-term costs, not just give me a “newer” car?
Auto Loan Refinancing: An Alternative Strategy
- When Refinancing Makes Sense?
- To Improve Your Equity Position: If you are currently in negative equity (upside down) but want to reduce the debt faster, refinancing into a shorter-term loan (if you can afford the higher monthly payments) will accelerate the process of building positive equity.
- To Lower Monthly Payments (Temporarily): If you are keeping your current car for a few more months or a year before trading in, you can refinance to a lower interest rate (if your credit score has improved or market rates have dropped). The money you save in interest and lower payments can be set aside for a down payment on the new car.
- To Consolidate Debt (Caution):Some specialized "cash-out" refinancing options allow you to refinance and receive extra money but be extremely careful. This may lead to being underwater (negative equity) for a longer period, making a trade-in more difficult later.
- Refinancing Before Trading?
Generally, refinancing a car loan immediately before trading it in offers little value, as the dealer will simply pay off the new loan instead of the old one. The true benefit of refinancing is seen when you do it months in advance to lower your overall borrowing cost or quickly transition from negative to positive equity.
Refinancing vs. Trading In: Key Differences
|
Feature |
Refinancing Your Current Car |
|
|
|---|---|---|---|
|
Goal |
Change the loan terms (rate/payment) on the same vehicle. |
Change your vehicle and establish a new loan. |
|
|
New Debt |
Only replaces the existing loan principal. |
Involves the new car price plus any rolled-over negative equity |
|
|
Trade-In Impact |
None; you keep your car. |
The dealer pays off your old loan as part of the transaction. |
|
|
Convenience |
Simple online or bank process, often completed within a few days. |
Requires time at a dealership, negotiation, and paperwork. |
FAQs
Can I trade in my financed car after 1 year?
Yes, it is possible to trade in a financed car after one year. However, keep in mind that the car's value may have depreciated significantly during that time, potentially leading to negative equity. It's important to consider the remaining loan balance, the car's trade-in value, and any potential financial implications before making the decision to trade in a financed car after a short period of ownership.
How soon can you trade in a financed car?
You can trade in a financed car anytime, but it's best to wait until the car's value is more than the amount you owe to avoid financial setbacks. Evaluate your situation and loan terms before making a decision.
How does trading in a financed car work?
Trading in a financed car involves the following steps:
- Determine your car's trade-in value by using online tools or visiting a dealership.
- Compare your car's trade-in value to the remaining loan balance to understand your equity position.
- If you have positive equity, the dealership will apply the trade-in value towards your new car purchase, reducing the amount you need to finance.
- If you have negative equity, you'll need to pay off the remaining loan balance or roll it into your new car loan, increasing the total amount you owe.
It's essential to consider your financial situation, loan terms, and the potential impact on your monthly payments before deciding to trade in a financed car.
What is a car loan trade?
A car loan trade is the process of trading in a vehicle that is still under an active loan agreement. The trade-in value is used to pay off the remaining loan balance, with any positive equity potentially applied towards the purchase of a new car.
What does it mean to have approved car financing?
Approved car financing means a lender has reviewed your application and agreed to provide you with a loan to purchase a vehicle. This approval indicates that the lender is satisfied with your creditworthiness, income, and other financial details, and they outline the terms of the loan, such as the interest rate, loan amount, and repayment period.
A Final Note: Visit Car Rookie for Your Next Car Purchase
If you’re considering trading in your financed car or purchasing a new one in Toronto, Car Rookie is your go-to destination. With a wide range of vehicles, competitive trade-in offers, and a team dedicated to simplifying the car-buying process, Car Rookie ensures a hassle-free experience. Whether you’re dealing with positive or negative equity, their knowledgeable staff can guide you through every step, from evaluating your trade-in to securing approved financing for your next vehicle. Start your car shopping journey today at Car Rookie and drive away with confidence!
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