Want to trade in a car that is not paid off yet?
Financing a vehicle is the most approachable method of owning a new car right now. Albeit technically speaking, you don’t own the car until you’ve paid it off entirely. But you do have some flexibility regarding how you handle the car loan.
With that said, it’s common for some folks to want to trade-in their financed car after a few years with a standing debt. In fact, if your car has been problematic to own, or your needs have changed, or even if you just want something better, and you have breathing room financially, trading-in for newer car can prove to be a prudent move.
There are a few things you should understand before you attempt to trade-in a financed vehicle though, having some prior knowledge can help you make the right decision for your status quo.
How does it work?
Your debt doesn’t just vanish when you attempt to trade-in with an auto loan already. Before you can make the trade-in, the dealer will conduct a car appraisal beforehand to determine your car’s declared value, and that value is essentially how much the vehicle is worth as decided by said dealer. The dealer will then pay the amount of money the car is worth towards your loan. If the loan is paid off in entirety, the lien is released, and the car ownership transfers to the dealer. The remaining value of the car will be taken as a down-payment towards your next purchase.
However, if you’re dealing with negative equity on your loan, where the amount you owe exceeds the appraised value, the remainder of the loan after subtracting from the trade-in value will be transferred towards your new loan. This is referred to as ‘rolling over’. Hence, your new loan will be the amount you borrow plus your remaining debt from your previous loan.
Why trade-in a financed vehicle?
There are definitely valid reasons to get rid of your current car and take on a new loan. The most obvious being that you have a problematic car, where the running costs have gone beyond what you’ve expected or you want precisely want to avoid those costs by getting a newer vehicle sooner rather than later. In this case, you might want to trade-in your financed car even if you’re dealing with negative equity.
Following that, if your needs have changed, it might also make sense to trade-in the car you already financed. Circumstances are dynamic, and over time you might need a pre-owned minivan for your growing family, thus it makes sense to get rid of your sedan or coupe.
Finally, make sure to check the dealership’s specials as sometimes the dealer offers significant incentives for the trade-in.
Loaning terms often impose a pre-payment penalty. Since lenders make money off interests, paying off your loan earlier on will yield you a considerable penalty that might outweigh the advantages for trading in.
Finally, if you’re about to finish your amortization period, you might want to hold off on the trigger. After you own the car, your options do broaden a bit, and you no longer have the need to limit yourself. In fact, it’s often worth it to make a bit of cash off your car rather than trading in and defaulting the car to be your down-payment.
Your next step
If you have made the conclusion to make a trade-in, there are still a few things you should do beforehand. Do your research for any car you’re thinking about purchasing. Read the contract for every deal you’re about to make, even if it seems tedious. Take your time, and ask all the questions you might have.
Lastly, it is important for you to understand your car’s equity. Negative equity isn’t necessarily a bad thing as well. At Garston Motors in Cambridge Ontario, car appraisal is a service that we provide, and we always ensure that we provide fair and just appraisals to all customers. Do get in contact with us, and we’ll be sure to sort you out with the most ideal auto financing solution for your situation.