If you're looking for a new car but still owe money on your current car, you might be wonderinghow to trade in a carit is not paid. What is important is whether the value of your car is higher than the outstanding balance of your loan. Here's what you need to know.
Key learning points
- The first thing you need to know is how much your car is worth.
- If your car is worth more than you owe on it, you have positive equity and can use that money to buy your new car.
- If you owe more than your car is worth, you will have to settle the difference with the dealer.
- It is also possible to trade in a lease car before your lease contract has expired.
This way you know what your trade-in is worth
If you're planning to trade in your car, it's important to know thishow much it is worthbefore going to the dealer. Without this information you may have to accept onelowball offerfrom the dealer without you being aware of it.
You can check the value of your car online atKelley blue bookor other assessment guidelines.It is a good idea to consult several such manuals, as they calculate the value in a different way and often arrive at different figures.
Keep in mind that you will almost never get as much with a trade-in as you would if you sold the car privately. But if you know how much your car is worth, you can prevent it from being misused.
Trade in car with positive equity
If your car is worth more than you owe on the loan, you're in a relatively simple situation. For example, let's say the dealer offers you $13,000 for your car and you still owe $11,000 on your loan. When you trade in your car, you get the difference ($2,000), which represents your equity in the car.
If you finance your new car, you can use the equity in the old car for your down payment. It can be a way to reduce the overall cost of your new loan. You can add more money if you want to make a larger down payment and borrow even less. If you pay cash for the car, the dealer can deduct your trade-in from the total price you pay.
Trade in car with negative equity
If you owe more on your current loan than you can get for your trade-in, you are in negative equity territory. This is often the case if you aretrying to trade in a relatively new car, because cars quickly depreciate in value in the first few years of owning them. After you've had your car for a certain amount of time, depreciation will slow and your loan payments will gradually catch up. So if you have negative equity on your car, you may want to consider waiting to trade it in until your outstanding loan balance no longer exceeds the value of your car.
Otherwise you will have to make up the difference. Your dealer may offer to include that amount in your new loan, but be careful. If you do this, you'll start your new loan with even more negative equity. So you may find yourself in the same situation in a few years when you trade in that car.
Can you trade in a lease car?
Trading in a car you are currently leasing is possible and works in the same way as trading in a car with an outstanding loan balance. To see what the return or purchase value of the car is, you must first contact the leasing company or look at your lease statement. This is the amount you have to pay if you want to buy the car outright before the end of the lease agreement. You also want to know whether there is a compensation for early termination of your rental contract.
Once you have this information, you can contact the dealer where you purchase your new car and have them work directly with the leasing company. Because there are often early cancellations or other costs associated with paying off a lease car, you may not receive the full amount for the trade-in of your lease car. So, just like trading in a car with negative equity, it may make sense to wait until your lease is up and take advantagepurchase option.
At that point you obviously don't have to buy the car at all, you can just hand it in and walk away. And unless you plan to drive that car for a while before trading it in – or a car dealer is willing to pay you more for it than the option will cost you – it may be a smarter move from a financial perspective.
In short
If your car's trade-in value is higher than your current loan balance, then you're good to go: You can simply pay off the old loan and apply the difference to the price of your new car. But if you owe more on your car than the trade-in value, you'll need to make up the difference. Then it may be a better move from a financial perspective to wait until you have paid off your loan a little more.
