So you’re in the market for a new car. Trading in your car is a great way to apply the value of your old vehicle to your new one, all while avoiding the hassle of selling it yourself. The only issue? You haven’t paid off your current ride.
Trading in a car you still owe money on is trickier than simply switching an old car for a new one. Here’s what you need to know to trade in a car that is not paid, so that you don’t wind up with major car payments you can’t afford.
Find out how much your car is worth
Your first step to trading in a car is finding out how much it’s worth. You’ll want to do your own research, rather than relying solely on what your dealer has to say. There are plenty of free online appraisal tools, such as Kelley Blue Book or Edmunds, where you can get a sense of your car’s current value by comparing average selling points in nearby areas.
It’s safe to say that you’ll probably never get as much from a trade-in as you would if you sold your car privately. Still, doing your research is important so that you don’t get ripped off during your trade-in.
If you owe less on the car than it is worth...
Once you find out how much your car is worth, you need to compare that to how much you owe on it. If your car is worth more than you owe on it, congrats! You have positive equity, which makes trading in your car pretty straightforward. When you trade in your car, you get to keep the difference (your positive equity) and can use that money toward your new car.
If you owe more than the car is worth...
Negative equity is where things get tricky. If you owe more than your car is worth, you’ll have to cover the remainder out of pocket. Your dealer may offer to include that difference in your new loan, but you probably don’t want to take that deal: You’ll be rolling negative equity into a new loan, meaning you’re still paying for a car you’re no longer driving. Plus, you’ll be dooming your future self when you go in to trade this new car in a few years.
The bottom line
If your car is worth more than you owe on it, you have positive equity that you can apply toward your new ride. If you owe more than your car is worth, you have negative equity that you’ll have to make up.
In most cases, you should aim to pay down your car loans before trying to trade it in. If paying down your loan is not an option for you, then focus on saving enough to at least break even when you go to trade in your car. Otherwise, you could be trapping yourself in a cycle of negative balances from one auto loan to the next.
