If you are in need of a new or different vehicle but have not paid off your current car, a dealership may still be able to make you a trade-in offer. Trading in your old car will mean either paying off the balance or rolling the debt into the loan of your new car purchase. This is possible but may not make the most financial sense.

If your current vehicle is worth less than the amount that is owed, the vehicle is considered upside-down or underwater, meaning the negative equity will have to be financed with the new vehicle. If the value of your current car exceeds the current loan amount the dealership can pay that off for you and roll any positive equity into the deal as a down payment. 

Many car dealerships accept trade-ins of vehicles that have not been paid off. Most of these dealerships even promise to pay off the balance on your auto loan.

However, unless your local dealership is a charity, it will not make your loan disappear; it will pay off what you owe your lender and find a way to factor the expense it incurred into the price of the vehicle you purchase. 

Before you begin negotiations, you should understand how the trade-in process works to avoid unpleasant surprises down the road.

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### Trading in With Negative Equity:

If the balance on your old loan is higher than the agreed-upon trade-in value, you have negative equity. The dealer may call this upside down or underwater, and the difference in value will be added to the amount of your new loan, in essence increasing the cost of your new car. You will begin your new loan already upside down.

Continuing with our example, if the loan balance is $17,000 and the trade-in price is $15,000, the difference of $2,000 will be added to the cost of the new car. This means you will either need to make a larger down payment to cover this additional cost, or more money will be needed in the form of a loan.

It is important to know that adding the negative equity of your old loan to the new loan will increase your monthly payment, and may raise the interest rate as well. In this example, the cost of the loan with $10,000 in positive trade-in value would be much less than with $2,000 dollars of negative equity. That seems obvious, but the difference is more than just the initial price. Increases to monthly payments and the additional interest make rolling over the remaining balance even more expensive.

In the first example, the trade-in value of the used Elantra is $10,000 more than was owed. That value is subtracted from the purchase price of the new vehicle for a loan amount of $22,900. At an interest rate of 7.5 percent on a 60-month loan term, the monthly payment would be $459 and the total interest paid would be $4,632 over the life of the loan.

In the second example, the negative equity of $2,000 would be added to the cost of the new Elantra N for a total loan amount of $34,900. Under the same loan terms, the payment would be $699 per month with a total interest paid of $7,059 over the life of the loan. 

Starting out with a loan that is upside down may also result in higher interest rates from lenders. The dealership will likely also try to sell you gap insurance, which covers the difference in the value of the car and the loan amount. Some lenders may require this coverage, but you can probably purchase it through your auto insurance provider for less. 

Another issue is getting into a pattern of rolling debt from one car loan into another and into another. This problem becomes even more of an issue as the length of loan terms is stretched out to as long as 96 months. Getting stuck in this cycle can make it difficult to get out from under the debt of your vehicle.

### Beware of Trade-in Scams

There are a couple of tricks that less-reputable dealerships may use to help entice you into a purchase despite the negative equity in your current vehicle. Though required by law to include the negative equity in the financing paperwork, dealers may use these tricks to make the buyer believe they have absorbed the negative value from the old loan.

In the first instance, the dealership will offer you more for your old car than it is worth and inflate the price of the vehicle you are buying. If your car is worth $6,000 and you have $2,000 in negative equity, a dealer may offer you $8,000 for your old car and sell you the newer model at $19,000. You may think you are scoring a great deal because the dealer is covering your negative equity and paying you $2,000 more for your trade-in than it is worth. However, the dealer is making an extra $1,000 in profit because the best price you could get on the new car is $14,000. The dealer knows that you will be too ecstatic about making a killing on your old car to question the price of the vehicle you are buying.

In the second instance, a dealer will offer you financing terms with a high-interest rate as a precondition for accepting your trade. The dealership recovers the cost of covering your negative equity from the extra interest it gains. In this case, the dealership violates the Truth in Lending Act because it deprives you, the customer, of the opportunity to refinance the negative equity through other means. These interest rates can be as high as those you would find on credit cards, meaning a significant portion of the total cost will be interest. With high enough rates, you could pay more in interest than the actual cost of the car.

### Do Your Homework

Prior to heading to the dealership, doing a little research can have you more prepared for the financial negotiations. First, research the car you are interested in and have an idea of the total price you are willing to pay for it. 

Next, look into the approximate trade-in value of your current vehicle, so that you know what a reasonable offer from the dealer would be. If you have an existing relationship with a bank or credit union, research your loan options in advance to understand the loan terms and interest rates that may be available to you. 

Knowing all of this information will prepare you to find numbers that don’t make sense, which may be where the dealer is hiding the negative equity of your old loan balance. 

If you don’t have a bank or credit union, you should at least check your credit score; bad credit may mean unreasonable interest rates on the new car loan from dealerships that promise to get anyone financed regardless of credit history. Often it will be best to hang on to your old car, rather than pay a higher interest rate on a larger loan including both a new vehicle and the balance of your old loan.

When purchasing any car it is advisable to talk to more than one dealership. Start by emailing them, and get any offer in writing. This pre-shopping means you can compare the offers of multiple dealerships. Some dealers may be hesitant to give written offers or may require you to visit in person before any numbers can be discussed. 

Focus on the total cost of the vehicle rather than the monthly payment. Dealers will try to get you to focus on one number, like the car payment, and will adjust the length of the loan to meet that goal. 

A longer loan term will cost you more in interest and add to the overall cost of the vehicle. You may want to pay off the loan early and avoid paying some of the interest, but in most states, it is legal for the lender to charge a fee for paying off the loan early, which can also add to the expense of the loan.

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### Is It Ever a Good Idea to Trade in When You Have Negative Equity?

If possible it is always best to pay off your loan rather than rolling the negative equity into a new loan. If you can, delaying a new car purchase until you are able to pay down the old loan will save you money on interest, and keep you from starting a new loan already underwater. 

Sometimes it is not possible to delay the purchase of a new car, or the old car is not reliable enough to get you around. If your old car is costing you more in fuel, maintenance, and repairs than the cost of entering into a new loan it may make financial sense to get rid of the money-pit, even if it means rolling over a little debt. 

It also may be a good idea if the new car you are considering is an amazing deal. If you can save more on the initial price of a new car than you have in negative equity, it might be a good time to buy. If a dealer has been sitting on inventory or needs to meet a quota, there may be heavy incentives on certain new cars, though that is less common with current inventory shortages.  

### How to Avoid Negative Equity

The moment a new car leaves the dealership, it loses a significant amount of its value, meaning buyers are often facing negative equity as soon as they take possession of their new ride. 

During the finance process, the dealership will try to sell protection packages, maintenance plans, or warranties. These additional costs can put buyers upside down before the paperwork is even done. These expensive packages are added to the loan amount, which means if the financed car is worth $14,000, and you put $2,000 down, but add a $3,000 warranty, you now have a loan for more than the purchase price of the car. 

Buyers have to decide if the assurance of these additional packages are worth the cost. 

It is also good to carefully evaluate your needs. Many buyers purchase their cars based on rare or potential situations. You may tow a trailer once every few years, but that doesn’t mean a full-sized truck is the best vehicle for you. 

Selecting a lower trim level with fewer features may be enough car for your needs, and much better for your bank account. Buying a vehicle that fits your daily reality rather than purchasing for anticipated or imagined needs will help you maximize your dollar, especially if you are on a tight budget or facing difficult credit terms.

### How to Trade In A Car

At the car dealership when you are shopping for a new purchase, let them know you are interested in trading in and that your current vehicle is not paid off.

Someone from the dealership will inspect your vehicle and give you a trade-in price. 

Keep in mind that this price is negotiable. Arm yourself with knowledge of the value of your vehicle in advance. Consulting Kelley Blue Book, Edmunds, and other resources in advance can help you negotiate the price of the car you want as well as the trade-in value of your car.

You will usually get more money selling a used vehicle to a private party, so don’t expect the maximum price from the dealership.  However, there are advantages to trading in, like avoiding a portion of sales tax, or the dealership handling some of the extra steps between banks or in the title transfer process.

Once the prices for your old car and the new vehicle have been agreed upon, the deal can be completed. The dealership will subtract the value of your old car from the cost of the new vehicle to determine the net cost of the transaction.

Time for a little math. Let’s say you have a 2019 Hyundai Elantra SE with 42,000 miles in very good condition and it is worth $15,000. You are interested in upgrading to the fantastic 2023 Elantra N and you talked them down to paying just the MSRP of $32,900. This means you will have to finance or pay the remaining $17,900. 

If you owe more money than the value of your trade-in, you will sign over the title, and the dealer will pay off the loan with your old lender. The dealer will roll the difference between the agreed-upon value of your car and the loan balance into the new loan you will be taking out.

If you owe less on your current vehicle than the payoff amount, that is positive equity and it’s good news for the cost of your new loan. Let’s say the payoff amount for your current loan on the 2019 Elantra is $5,000. The difference between that and the trade-in value is $10,000, which the dealer will subtract from the price of the car you are buying. This will decrease the amount of loan required for the new car. 

### Bottom Line

Dealerships often promise to pay off the loan on your current vehicle if you trade it in for a new one. This may seem too good to be true, and it is, especially if you owe more on your current auto loan than your car is worth. If you have negative equity, the dealership will add that difference to the cost of your new vehicle, and ultimately you will pay the cost as part of your new loan. 

If you have positive equity in your car, the process is the same as selling your used car to the dealership and using those funds to pay off the loan, but the dealer most likely pays you less for the car. 

If you have time and energy, your best option is to sell your vehicle to a private party, maximize the sale amount, and pay off the remaining loan with the money while keeping any extra for yourself or use it as a down payment on your next car. 

The process of trading in your car for a new one can be intimidating, and a loan balance only makes it more complicated. By following the simple guidelines outlined in this article, you can avoid major mistakes. Be sure to do your research, don't be pressured into making a decision before you are ready, and be wary of any information that does not line up with your researched expectations.

Dealerships that will pay off your trade no matter what you owe: Trading in your car can be confusing, particularly if it is not paid off. This article covers the basics of trading in a car that is not owned outright.

How To Trade In a Car That Is Not Paid Off

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