Legally, you can trade in your loaner car at any time. The question here isn't so much whether you should trade in your car after a year or two, but rather how much money you stand to lose or gain at any point during the loan period. Equity is the difference between your car's trade-in value and your remaining loan balance. You have equity in your car - you just need to figure out if it's positive or negative.
The first step is to find outhow much your car is worth. Then subtract the current loan balance and any prepayment fees associated with your loan. A prepayment penalty is a fee you must pay the lender.whenif you repay your loan early. This is something you would have agreed to in your car loan agreement. The easiest way to find out if you have a prepayment penalty is to find the electronic agreement and use Ctrl + F to search for the term "prepayment", or contact your lender for more information about the situation .
What you do then depends on whether you have positive or negative equity.
When you have positive equity
Your best case scenario is that you have positive equity in your vehicle. This means you can sell your car for more than you owe on it. In other words, you can pay off your loan and still make extra money on a sale. When you trade in your car, you can use the equity in your current car as a down payment for your new car.
When you have negative equity
If you owe more money on your loan than you could sell your car for, it means you have negative equity. Don't worry: many borrowers find themselves in this situation, especially at the beginning of a loan period, and this isn't the worst of it. You still have some good options.
- Pay the remaining balance out of your own pocket.If it is urgent and necessary to replace your vehicle, we recommend that you tap your savings to finalize the financing agreement with your lender. However, make sure you call your lender before going to a dealer to understand how their process works.
- Wait until your car has positive equity.If you've financed a new car, you'll likely be on the hook for your loan within the first minute of pulling off the lot. New cars depreciate significantly faster than used cars: a 10% drop in value in the first minute after leaving the parking lot. It makes more financial sense to trade in your car after 1 year, after you have enjoyed it for a while longer. As a general rule, you should trade in your car after at least 2 years for a better chance of positive equity.
- Trade in for a smaller car.Sometimes you don't have time to wait for your car to gain more equity. You can trade in your car for a lower fee - buy a cheaper, smaller car. We compiledbest cheap carson the used market, especially for you.
If you feel the urgency of this decision, avoid these situations:
- Do not roll negative equity into a new loan.Although it is possible for you to convert your outstanding loan balance into a new car loan, this is not wise. You'll actually pay more interest on that amount and potentially increase your chances of having your next loan turned upside down. When you borrow more than what the car is worth, you put yourself in a potentially worse position.
- Don't focus too much on monthly payments. If you decide to trade in a car with negative equity, don't be tempted by lower monthly payments at the expense of more interest over a longer period. When comparing loans, make sure you compare the amount you pay over time.
