Should You Trade In Your Car If You Still Owe Money on It?

You’re ready for a new car, but there’s one problem: You’re still making payments on the one in your driveway.

The good news? Having a car loan doesn’t necessarily mean you have to wait to trade in your vehicle. What matters is how much you owe compared with what your car is worth.

Before you head to the dealership, here’s what to know.

Start with two numbers

First, find out your loan payoff amount. This is how much it would take to pay off your current auto loan in full. It may be slightly different from the balance you see on your monthly statement.

Next, get an idea of your car’s trade-in value.

Compare the two numbers and you’ll have a much better picture of what you’re bringing into your next car purchase.

If your car is worth more than you owe

Let’s say you owe $12,000 on your current loan and your vehicle is worth $16,000 as a trade-in.

That leaves you with $4,000 in positive equity.

That equity can typically be applied toward your next vehicle, much like a down payment, reducing the amount you need to finance.

What if you owe more than the car is worth?

Now flip the numbers.

If you owe $16,000 but your trade-in is worth $12,000, you have $4,000 in negative equity.

That $4,000 doesn’t disappear when you trade in the vehicle. You’ll need to account for it as part of the transaction.

In some cases, the balance can be rolled into the loan for your next vehicle. But that means you’re borrowing money to cover the balance from your old car in addition to financing the new one.

That can increase your new loan balance and your monthly payment, and you may begin the new loan owing more than the new vehicle is worth.

Should you still trade it in?

It depends.

Negative equity doesn’t automatically mean you shouldn’t trade in your car. Maybe your current vehicle no longer meets your needs. Maybe it’s becoming expensive to maintain. Or maybe you’ve found a deal that makes sense for your budget.

The important thing is knowing where you stand before you make the decision.

If you have significant negative equity and don’t need to replace the vehicle right away, continuing to make payments and giving the loan balance time to come down may put you in a stronger position later.

If you do decide to trade, understand exactly how any remaining balance is being handled and how it affects the amount you’ll finance on the next vehicle.

Know before you go

Just like getting preapproved before you shop, knowing your trade-in position ahead of time can make the car-buying process easier.

Find out your payoff amount. Research what your vehicle may be worth. Then look at the difference.