Can You Trade in a Financed Car?

There are always options, even when you think you’re locked into a financed car. If you’re wondering if you can trade in or sell a financed car, the short answer is, yes. Of course, there are a few important tips and trade secrets you’ll want to follow if you decide that trading in a financed car is right for you.

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How does trading in a financed car work?

The idea of a trade-in is either to trade your vehicle in for another that is either paid in full by the trade-in value of your old car, or the money can be put toward a higher-priced vehicle. The vehicle can also be sold outright to the dealer, however, you may still owe money on the payment plan.

If you still have payments left on your car but want to sell it, a trade-in may be a more attractive offer, especially if you still need a vehicle. A seller can apply the value of their trade-in to a newer or different vehicle. Essentially, the dealership is purchasing the trade-in car and applying the payout to the new vehicle and the buyer is responsible for the remainder of the vehicle’s cost.

How soon can you trade in a financed car?

Determining when to trade in a financed car all comes down to how long your loan agreement is.

“You are financing the price of the car and the taxes—you need to remember that,” said a financial and insurance manager at a Montreal Subaru dealership. “If you want to walk away, you’re paying those taxes. And if you walk away early on a 60-month loan, let’s say, then you are in a negative equity, only paying the taxes so far.”

You can trade in a car at any point in the loan, but the remaining balance will determine whether you’ll have positive or negative equity.

What is negative equity?

In simple terms, positive equity means you owe less on the car than it’s worth on the market. So negative equity means you still owe more than the car is worth on the market and are on the hook for the remainder of the money owed on the payment plan.

Consider how far along you are in your loan payment. “A lot of manufacturers are pushing for longer and longer financing, which makes for lower monthly payments, but it’s not the best idea,” said the expert. “It’s a depreciating asset.”

Trading in a car with positive equity

Ideally, this is where you want to be when you trade in a financed car. You want to have positive equity, which means you owe less than what the car is worth. You can build positive equity by making extra payments along the way or by ensuring you’re far enough along in the payment loan on a car that holds its residual value well. If you owe much less than the vehicle is worth, you can either pocket the cash or put it toward a new vehicle loan.

Trading in a car with negative equity

This is a much less desirable situation to be in, but it tends to be the case for most people—most cars lose value the moment they leave the lot, so it’s a likely scenario unless you make extra payments or your vehicle holds its value exceptionally well. It can still work, you just need to be aware of where you are in the loan and how much is left.

“We take the car back at its book value. So, even if you owe $20,000 and the car is only worth $18,000, you’re still responsible for that $2,000,” said the expert.

This might not be an issue for those in a more financially stable situation, but if the reason for the trade-in is to put a stop to monthly payments, knowing how much is potentially left on the loan is extremely important and could make or break the trade-in process.

This means you, the seller, need to ensure you can still pay off the remainder of the loan. While the process may differ from dealership to dealership, you are essentially left with the loan to pay back to the bank, even without the vehicle being attached to it.

Another important point to remember when it comes to negative equity is how new the loan is. Often there are penalties for requesting a loan break or closure through a dealership. This may be a simple payment of a percentage of the total left or it could be more severe like a fee due for each remaining month on the term of the loan—the bank wants to ensure they don’t miss out on the interest income from those remaining months. This will vary by financial institution, and depend on the initial terms agreed upon when purchasing the vehicle.

How to trade in a financed car

While trading in a financed car might seem complicated and overwhelming, it doesn’t have to be. Here’s how to navigate the process:

Make sure all your paperwork is in order

You’ll need your vehicle’s registration, all past work statements from the garage (if any was done) as well as the title to the vehicle. Even if you’re bringing your vehicle back to the same dealership you bought it from, you need to make sure you bring your own loan paperwork. Don’t rely on them. Remember your license, proof of insurance and all keys and key fobs.

Find out how much you owe

This is an extremely important step when trading in a financed car. You can speak to the financial department of the dealership where you purchased your financed car, and they can also tell you your exact loan rate, how many months you have left and the total remaining balance.

Speak to the bank if you know you’re going to owe money on the trade-in

Dealerships are also trying to make money, and if they see you owe quite a bit on your trade-in, they’re going to want to roll that into a new loan for you. Since this could result in a much larger loan for the new vehicle, come prepared with a solution from the bank. Speak to a financial adviser at the institution linked to the car loan for options and bring those options to the table when you speak to the car dealership about the trade-in.

Know the value of your car

Do your research. Certain cars hold their residual value more than others. Toyotas and Subarus are two brands held in high regard for resale value. J.D. Power and Associates put together an annual list with top resale value vehicles that you can peruse.

Realize when a trade-in isn’t a good idea

If you find yourself with a lot of negative equity, putting it toward another loan may not be a great solution for those in a tight financial situation. Paying back a $3,000 loan will be better than another $30,000 loan for another car, even if you really want to upgrade. Your best bet may be to stick it out with your current vehicle until you’re in a better financial position to finance a new one.

Is trading in a financed car right for me?

Deciding whether or not trading in a financed car is right for you is personal, but it depends on more than just the status of your loan. It’s important to consider the following:

Trading in a financed car might be a good idea for you if:

Your vehicle has high ownership costs. It’s easy to take out a loan without realizing the long-term costs associated, and not just with the bank. From gas prices to maintenance fees, some vehicles cost more than others to run.

You can no longer afford such a large loan. Even if you are in a negative equity situation, sometimes bringing your financed car back to the dealer is the smarter financial decision.

Your dealer is offering incentives at the end of their financial year to clear out stock. You might be able to trade in your financed car for something you may not have thought you could afford before with a lower loan rate and reduced prices. Even if the vehicles are comparable, a trade-in could essentially amount to refinancing if the rates are lower, saving you money over time.

You have positive equity. You stand to make some money in this case, or at least save money in the future. Depending on the value, your trade-in could even be enough to fully cover the cost of a new vehicle.

Consider holding on to your car if:

Your loan is fairly new. There may be penalties that make the transaction an imprudent financial decision.

You’ve got negative equity. Even if you are far along in your loan agreement, this could still be the case if your car has a low residual value. Research is key here and how much of the gap you can stand to cover depends on your personal financial situation.

Your vehicle has been in an accident. Even if your vehicle typically holds its resale value, the condition of the car when you bring it back to the dealership will determine the value of the trade-in. Every repair the dealer must make is money out of their profits, and likewise money out of your pocket.

Your loan is almost paid-off and your car has low ownership costs. This means that your monthly payments will be reduced to gas and the occasional check-up if your car is healthy and well-maintained. Unless you really need or want a new car and are in a strong financial position to do so, you’ll save money by getting more mileage out of your current vehicle.