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3 min read Published April 18, 2022
Authored by Kellye Guinan. Written by personal and Business Finance Contributor
Kellye Guinan is a freelance editor and writer with over five years of experience in personal finances. She also works full-time as a librarian at the local library where she assists people in her community get information about financial literacy, as well as other topics.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances by providing precise, well-researched and reliable information that breaks down otherwise complex subjects into digestible pieces.
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If you have a balance on your car, there are a few steps you should take before trading it in. Be careful, however — negative equity can affect your finances. This is a viable option, but it could mean paying more than you’re required to. When should you pay off your car prior to trading it in In nearly all instances, it’s better to pay off or pay off your before selling it or trading it in. The primary concern is whether you have negative or positive equity in your loan. If you have equity that is negative, you will want to pay the auto loan before trading in your car. Possible equity A positive equity in an auto loan means that you owe less on the vehicle than its value. So, if you’re left with $10,000 on your loan but your car is worth $15,000, you’re left with $5,000 of positive equity. If you decide to sell your vehicle, the positive equity can go toward your next vehicle as a down payment, reducing the amount you’ll need to be able to borrow. Negative equity Negative equity can be described as the opposite. If you still need to pay back $10,000 on your loan but your car is worth only $8,000, you’ll have $2,000 in negative equity. This is what lenders and columnists in the field of financial advice call ” .” It’s something you do not want to find yourself in. If you decide to trade in your car, you’ll be required to pay for the remaining out of pocket. In addition, breaking even is essential because it keeps you from rolling negative equity into the new loan and paying for the vehicle you’re not driving. What is the best way to sell or trade in a car you still owe money for. People swap in and sell vehicles that have liens on them frequently. Dealers can advertise paying off your car for you after they upgrade it to brand new model. But is more complex than simply switching from one car to another. Research your car’s value on sites like Edmunds as well as Kelley Blue Book. Take a look at cars with the same trim and check out average selling prices within the same area. Estimate your budget for the next vehicle and what you owe on your current one. If you have debt that is greater than what you’ll get by selling it, think about other options. Take care to collect maintenance records and other paperwork. This may help increase your car’s value as a trade-in by proving that it’s been taken care of. Check out trade-in deals from dealerships so you don’t have to visit one location. Many people use the phrase “trade-in,” but really it’s selling your vehicle. It is possible to search for quotes from different companies to get the most competitive price. Get everything in writing particularly if the dealership assures you that they will pay off the loan. Make sure you have a copy of the offer. You’re still accountable for paying back your loan and you must follow up and make sure you’re lender is paid once you trade in your car. Alternatives to trading in an automobile If you’re in default on your loan selling it is unlikely to be the most effective option. Instead, consider selling your vehicle to an individual buyer or paying down the loan in full or refinancing the loan at a lower interest rate. Utilizing a private buyer, as opposed to a dealership, may assist you with more. But, you’ll need to handle paying off your lender and then transfer the title on your own. This is something the dealership usually does for you, but it may be an added burden. In the end, paying down the loan may not be an option for most. If your monthly payments aren’t breaking the bank, set aside some extra money to break even. So, trading your car in won’t involve the transfer of any remaining loan balance onto your new auto loan. Try to do this . Do not extend your loan term in an attempt to lower your payment — this increases the chance that you’ll be upside-down. Instead, you should reduce the total amount you have to pay. Next steps Provided you aren’t over the limit on your loan and you aren’t in a position to trade in your vehicle for an option that is less costly could be the best option. If you do have equity that is negative, you can try refinancing it instead. It may allow you to reduce your interest rate, so that you pay less in total. The most important thing is to not roll your remaining loan in to a brand new loan. Talk to your lender or get rid of your car, or look for an alternative option in order to not take on more debt if you can help to pay it. Find out more
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Written by Personal and business finance contributor
Kellye Guinan is a freelance editor and writer with more than five years ‘ experience within personal finances. She’s also a full-time librarian at the local library, where she assists people in her community get information about financial literacy, among other subjects.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances through providing precise, well-studied information that breaks down otherwise complicated topics into bite-sized pieces.
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