In order to trade in a car, you need to have the lienholder removed from its title. If you’re still paying on a loan, it means your lender has a lien on the vehicle’s title. You're free to do what you want with the car once you pay the loan balance. If you're in this situation, you need to know the steps to take if you want to trade in your vehicle with a lien on the title.
How to Trade in a Car with a Lien on the Title
If you still owe on a car, your lender has a lien on the vehicle's title. This means they're technically the owners of it until the loan is paid off. So, in order to trade in a car with a lien on the title, you first have to remove the lienholder by paying off the loan.
In order to do this, you can go to a dealership and see what they can give you for your trade-in. The dealer can then pay off your lender, which removes the lien, with the proceeds from the trade-in, but what you owe on the loan compared to what your vehicle is worth plays a huge role in how this is handled.
Equity and Your Trade-In
Equity is when your car is worth more than what you owe on the loan. Ideally, you want to make sure there’s equity in your trade-in.
To find out if there’s equity, you need to get your trade-in appraised by a dealership, and get a loan payoff amount from your current lender. Then, you can take your loan payoff amount and subtract it from your vehicle’s appraised value to find its equity.
For example, if your trade-in is appraised at $9,000, and you owe $3,000 on your loan, you have $6,000 in equity. In this situation, the dealer would pay your old lender $3,000 to pay off the loan and remove the lien, and then you would have $6,000 to pocket or apply toward the purchase price of a new car.
If you were to flip the two numbers, you would end up with negative $6,000, which means that your vehicle has negative equity. This can make it more complicated to trade in a car with a lien on the title.
When There’s Negative Equity in Your Trade-In
Negative equity is when your car is worth less than what you owe on the loan. Most people experience negative equity at some point, but it only presents a problem if you're trying to sell or trade in a vehicle before it's paid off.
If you have negative equity and there's a still a lien on the title, the dealer has no proceeds from a trade-in to pay off the loan and get it removed. You only have a few options that can get you out of being upside on your auto loan:
- Pay the difference – If you have the cash, you can pay the difference between what your vehicle is worth and how much you owe. The dealer can then pay off your old loan and have the lien removed.
- Roll the balance over – Not all lenders allow this, but it may be possible to roll the negative equity amount into a new loan. This increases your monthly payment and the total cost of your new loan, so it's an option that's best avoided even if it's available to you. However, rolling over the negative equity allows the dealer to pay off your old loan to get the lien removed.
- Wait it out – If you don’t need another vehicle immediately, you could wait to trade it in. This gives you time to get in an equity position so the lien can be more easily removed. However, the appraised value of your trade-in could drop depending on how long you wait, so be wary of that.
The Bottom Line
As long as the lien is removed, you can trade in your car. In an ideal situation, your trade-in would have equity and you can pay off the loan and remove the lien and still have money left over to use that as a down payment on a new auto loan.
When you’re ready to trade in your vehicle and get a new auto loan, Auto Credit Express is here to assist. For over 20 years, we’ve been helping consumers dealing with various credit issues find financing by matching them with local dealers with the proper lending resources available.
Our process is fast and our service is free of cost and obligation, so what are you waiting for? Go ahead and fill out our simple and secure car loan request form to get the process started today.