Trading in a car with a loan still on it is pretty common. Many people don’t run into issues getting through the process, but the state of your loan, how much you owe, and the value of your vehicle can all impact how smooth it goes. Your current car may help or hinder your next purchase, depending on its equity position.
Trading in a Vehicle With a Lien
A lien is what gives the lender the right to repossess the vehicle if you stop paying on the loan. So, your vehicle’s title has the lienholder on it, which is your lender. If you still have a loan on your vehicle, you need to remove that lien from the title to sell the car.
Removing a lien means paying off the loan, either naturally through payments during the loan term or when you get enough money to pay everything you owe. If you need to trade in your car while it still has a loan, it’s in your best interest to get an offer large enough to cover your loan balance. If you don't, you need to use your own funds to cover the difference.
This is where your vehicle’s value comes into play. There’s a few different values of your car, but the one you need to look at is the trade-in value. You can use online valuation sites to see what your vehicle is worth. Keep in mind, these are just estimates, but if your trade-in value is consistently higher than your loan balance, you’re likely in a good position to trade-in in your car.
This is called being in an equity position since you owe less on your loan than what your car is worth – it’s a great thing! If you get a larger offer that more than covers your loan balance, that equity can be put toward your next vehicle purchase as a down payment or you can pocket the money. If you find that you don’t have equity, it’s more of a sticky situation but it’s still solvable.
Negative Equity Trade-In
Negative equity is when you owe more on your car loan than what the vehicle can be sold or traded-in for. This can happen to borrowers who recently financed a new car that lost its value quickly or borrowers with loans that have a high interest rate that makes paying down the loan quickly more difficult.
There is a way to trade in a vehicle with negative equity without having to pay it off upfront. It’s called rolling over negative equity.
Rolling over the negative equity from your current auto loan to your next one may be possible. Say you have $1,000 of negative equity, and you want an auto loan that’s $10,000. The lender for your next car loan may accept the negative equity and add it to your next loan, making it $11,000.
Now, $1,000 of negative equity isn’t great, but you wouldn’t be that deep in the woods. But if you have thousands of dollars in negative equity, it may not be the wisest idea to roll it over. It could lead to very high, unmanageable monthly payments on your next car loan, and more interest charges.
Since auto loans are usually simple interest, the higher your total loan amount, the more interest charges you pay. Additionally, you may have to stretch your loan term to the max you qualify for which also leads to years of paying for a car, and even more interest charges because your interest is accrued daily.
Rolling over your negative equity isn’t typically recommended unless the amount is relatively small. You also have to remember that you’d likely be starting your next car loan in a negative equity position, and you may end up on the trade-in treadmill – repeatedly rolling over negative equity when you need another car loan.
Trading In a Car With Bad Credit
It may not be too hard to find a dealership in your area to accept your trade-in, but finding a dealer with bad credit lending options isn’t all that common. If you’re in need of a bad credit auto loan, a special finance dealership could help increase your approval odds.
Trade-ins also increase your chances of car loan eligibility, since most bad credit lenders, or subprime lenders, require a down payment. If your trade-in has equity, it could help you meet the down payment requirement.
Getting a trade-in offer can be as easy as calling a few dealerships in your area – but not all dealers are equipped to help with credit challenges. Here at Auto Credit Express, we want to make the search for your next car loan easier.
Over the last two decades, we’ve amassed a nationwide network of dealerships that are able to assist borrowers with less than perfect credit get the auto loans they need. Start the process of getting matched to a dealer by completing our free auto loan request form.