Buying a new car can be a fun and enjoyable experience, but trading in your financed vehicle can add stress to the buying process. Many car dealerships will allow you to trade in your car even if it is not paid off, but you’ll want to have some important information available before negotiating with the dealership.
Understanding Vehicle Equity
When you trade in your car, you actually sell the car to a dealership for an amount they offer. Dealers use a variety of valuation methods, but many use official publications to determine the trade-in value of your vehicle and extend an offer. If you have paid off your vehicle, the dealer considers the entire value of the car as equity and can apply that amount toward the purchase price of your new car. If you owe a balance on your car, the dealer will deduct your outstanding balance from the car’s value to determine the equity. If the car is worth $15,000 and you owe $10,000, for example, you will have $5,000 in equity that you can use toward payment for your new vehicle.
Exploring Negative Equity
If you owe more on your car than it is worth, dealers consider this condition “negative equity”; some dealerships may refer to this condition as being upside-down. In a negative-equity condition, you cannot pay off the balance of your loan even, if the dealer offers the full value of your car. If you owe $15,000 on your trade-in and it is worth $10,000, for example, you would have $5,000 of negative equity in your vehicle. Many dealers will still allow you to trade in a vehicle if you have negative equity, though some may not.
Assessing Payoff Process
If you finance the vehicle you purchase, dealers typically work equity, whether positive or negative, into the financing agreement. If you have positive equity in your trade, you will receive a credit toward the final price of the new car. If you have negative equity, you may have to finance more than the price of the new car to cover both the new car’s value and the remaining balance after your trade-in. Dealers typically confirm the payoff amount with your finance company, then either send a check or submit an electronic payment for your outstanding balance.
Other Important Considerations
Before approaching a dealer and offering your vehicle as a trade, you can research the value of your vehicle using online resources like Kelley Blue Book or the National Auto Dealers Association guide. You can also contact your finance company to determine the amount of your outstanding auto loan balance. By comparing your outstanding balance with the value of your car, you can determine the amount of equity you may have before approaching the dealer. If you have a high amount of negative equity, note that some finance companies may be unwilling to finance both the new vehicle and the negative equity in your old vehicle.
