Is it possible to trade in a car that's still on finance

Summary
When it comes to car ownership, there may come a time when you find yourself in a situation where you want or need to trade in your current vehicle for a new one, but you still have outstanding finance on it. This can often leave people wondering if it is possible to trade in a car that's still on finance. In this article, we will explore the options and considerations involved in trading in a car with outstanding finance, including the process, potential challenges, and alternatives to consider.

Understanding the Basics

Trading in a car that still has finance on it can be a more complex transaction than trading in a vehicle that is fully paid off. When you finance a car, whether through a loan from a bank, a credit union, or a finance company, you essentially borrow money to purchase the vehicle. The lender then holds a lien on the car as collateral until the loan is fully repaid.

When you decide to trade in a car that is still on finance, the outstanding balance of the loan needs to be addressed. The trade-in value of your current vehicle will be assessed by the dealership, and if it is greater than the outstanding balance, the dealership will usually pay off the loan and apply any remaining balance toward the purchase of your new car.

However, if the trade-in value is less than the outstanding balance, you will be left with a negative equity situation, also known as being "upside down" on your loan. This means that you owe more on the loan than the vehicle is worth. In this case, you may need to find a way to cover the difference in order to proceed with the trade-in.

The Process of Trading in a Car with Outstanding Finance

Trading in a car that is still on finance typically involves several steps. Let's break down the process:

1. Assess Your Current Finances: Before making any decisions, it's important to evaluate your current financial situation. Determine the outstanding balance on your car loan and compare it to the estimated trade-in value of your vehicle. This will give you an idea of whether you are in a positive equity or negative equity situation.

2. Visit Dealerships: Research and visit different dealerships to get offers on your trade-in vehicle. Keep in mind that each dealership may offer different trade-in values, so it's worth shopping around to get the best deal.

3. Negotiate the Trade-In Value: Once you have received offers from different dealerships, negotiate the trade-in value for your car. Be prepared to provide all necessary information about the outstanding finance on your vehicle.

4. Determine the Outstanding Balance: Work with your lender to determine the exact outstanding balance on your car loan. This will allow you to confirm the amount that needs to be paid off before the trade-in can be completed.

5. Pay Off the Loan: If the trade-in value is greater than the outstanding balance, the dealership will usually pay off the loan directly to the lender. However, if the trade-in value is less than the outstanding balance, you will need to find a way to cover the difference.

6. Apply Remaining Balance: If the trade-in value exceeds the outstanding balance, any remaining balance can be applied toward the purchase of your new car. This can help reduce the amount you need to finance for your new vehicle.

Challenges and Considerations

Trading in a car that is still on finance can present some challenges and considerations. Here are a few important factors to keep in mind:

1. Negative Equity: As mentioned earlier, negative equity occurs when the outstanding balance on your car loan is higher than the trade-in value of your vehicle. If you find yourself in a negative equity situation, you may need to cover the difference out of pocket or explore alternative options.

2. Financing the New Car: If you are able to trade in your car with a positive equity or cover the negative equity, you will still need to secure financing for your new vehicle. Be prepared to provide necessary documents and undergo a credit check to qualify for a new loan.

3. Interest Rates: When trading in a car with outstanding finance, you may be subject to higher interest rates on your new loan. This is because lenders view the transaction as carrying additional risk due to the negative equity. It's important to consider the impact this may have on your monthly payments and overall affordability.

4. Gap Insurance: Gap insurance is a type of coverage that can protect you in case of a total loss on your vehicle. It covers the difference between the amount owed on your car loan and the actual cash value of your car. If you decide to trade in a car that's still on finance, you may want to consider adding or maintaining gap insurance to protect yourself from potential financial loss.

5. Alternative Options: If trading in a car with outstanding finance proves to be challenging or impractical, there are alternative options to consider. These can include paying off the remaining balance of the loan prior to trading in, selling the car privately to pay off the loan, or exploring lease takeover opportunities.

Alternatives to Trading In

If trading in a car that is still on finance is not a viable option, there are alternatives to consider. Here are a few options:

1. Paying Off the Loan: You can choose to pay off the remaining balance on your car loan before attempting to trade in the vehicle. This can eliminate the need to involve a dealership and simplify the process.

2. Selling Privately: Selling your car privately can often fetch a higher price compared to a trade-in value. By selling the car yourself, you can use the funds to pay off the remaining loan balance and potentially have some money left over.

3. Lease Takeover: If you are leasing your vehicle, you may have the option to transfer the lease to another individual through a lease takeover. This can help you get out of the existing lease obligations without having to trade in the car.

4. Refinancing the Loan: If you are struggling with the current terms of your car loan, you may consider refinancing the loan to get more favorable interest rates and terms. This can potentially help you reduce your monthly payments and improve your overall financial situation.

Conclusion

When it comes to trading in a car that is still on finance, it is possible but comes with certain considerations and challenges. Understanding the process and assessing your current financial situation are crucial before attempting to trade in your car. Whether you find yourself in a positive equity or negative equity situation, it's important to carefully evaluate your options and consider alternative solutions if necessary. Remember to explore a variety of deals and negotiate the trade-in value for the best outcome.


20 October 2023
Written by John Roche