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Should you pay off your car before trading it in? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive financial calculators and tools that provide objective and original content, by enabling users to conduct research and compare information for free and help you make financial decisions with confidence. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this website are provided by companies that pay us. This compensation can affect the way and where products are displayed on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity, or other home lending products. This compensation, however, does affect the information we publish, or the reviews you read on this site. We do not include the vast array of companies or financial offerings that could be accessible to you.
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3 min read Published April 18, 2022
Written by Kellye Guinan. Written by Personal and business finance contributor
Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finance. She’s also a full-time worker at her local library where she helps her community access information about financial literacy, among other topics.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to take control of their finances with concise, well-studied information that breaks down complex topics into manageable bites.
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If you are still owing money on your vehicle, there are a few steps to take prior to trading it in. But be careful that negative equity could be a major impact on your finances. It’s a workable situation however it could result in paying more than you need to. When should you pay off your car prior to trading it in In nearly all cases, it is best to make a payment or clear your loan prior to selling it or trading it in. The primary concern is whether you have positive or negative equity in your loan. If you have negative equity you’ll need to pay off your auto loan prior to trading with your car. Possible equity On an auto loan means that you owe less on the car than it is worth. So, if you have $10,000 left 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 car then the equity you have can be used to purchase a new car as a down payment, reducing the amount you’ll need to take out. Negative equity Negative equity is the opposite. If you still need to pay back $10,000 on your loan however your car is only worth $8,000, you’ll be left with $2,000 of negative equity. This is what columnists in the field of financial advice call » . » It’s an unwise situation to find yourself in. If you trade in your car, you will be required to pay for the remaining out of pocket. And breaking even is important because it keeps the possibility of rolling negative equity into a new loan or paying for the vehicle you’re not driving. How to trade or sell an automobile that you owe money for. People swap in and sell vehicles that are backed by liens frequently. In fact, dealerships may offer to pay off your car in the event that you upgrade to a new model. But is more complex than changing one car for another. Research your car’s value through websites like Edmunds or Kelley Blue Book. Check out cars that have similar trims and look at average selling prices in the surrounding areas. Determine your budget for your new car and the amount you have to pay on your current car. If you have debt that is greater than you’re likely to get through selling it, think about alternatives. Gather maintenance records as well as other documentation. This could increase the value of your vehicle as a trade-in by proving that it’s been taken care of. Find offers on trade-ins from dealers so you don’t have to visit one location. Many people use the term « trade-in, » but really, you’re selling your car. You are able to shop for various quotes to find the best deal. Get everything in writing , especially if a dealership promises to pay off your loan. Be sure you have a copy of the offer. You’re still responsible for paying back your loan and you must follow up and make sure that your lender is paid once you trade in your car. Alternatives to trade in a car If you’re in default on your loan selling it is not the most effective option. Instead, think about selling your vehicle to an individual buyer and paying the loan in full or refinancing it at a lower rate. Working with a private buyer, rather than a dealership, may aid you in getting more. However, you will need to manage the process of paying off your lender and then transfer the title yourself. This is something the dealership usually does on your behalf, therefore it can be an additional burden. Paying down the loan isn’t an option for all. But if your payment isn’t breaking the bank, set aside some additional funds to make it even. In this way, selling your car in won’t involve the transfer of any remaining loan amount into the new car loan. Finally, try to . Do not extend your loan duration in order to lower your payments- this increases the chance that you’ll be upside-down. Instead, reduce the total amount you have to pay. The next step is if you’re not over the limit on your loan and you aren’t in a position to trade in your vehicle for cheaper alternatives could be the ideal solution. If you do have negative equity, consider refinancing your loan instead. It could help you reduce your interest rate, so that you pay less in total. The most important thing is to not roll the remainder of your loan into a new loan. In collaboration with your lender or get rid of your car, or look for an alternative option to avoid taking on more debt if you can ease the situation. Learn more
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Written by Business and personal finance Contributor
Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal finances. She’s also a full-time librarian at the local library where she helps the community gain access to information on financial literacy, among other topics.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing concise, well-studied and well-documented facts that break down complicated subjects into digestible pieces.
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