Even if you owe money toward you current vehicle's loan account, you can still trade it toward another purchase. If you owe nothing at all toward a loan, you'll receive a price reduction for the value of your trade-in. A trade-in can affect your new car loan in several ways.
Negative Equity
A dealership must pay off your loan to take your car as a trade, so any negative equity is transferred to your new car's purchase price. For example, if you owe $12,000 on a vehicle worth $10,000, the dealer will pay off your loan but transfer the extra $2,000 to your new car's purchase price. You may want to shop for a new car with rebates or provide a down payment to avoid remaining in a negative equity position with your new car loan.
Considerations
Your new auto loan provider may require that you provide a down payment if you're carrying over money from another loan because of the vehicle's loan-to-value ratio. A lender may approve a loan up to 120 percent of the vehicle's bank-determined value if you have excellent credit, or as low as 60 percent with poor credit. If you're unable to provide a down payment, consider your interest rate to decide if if carrying over negative equity is beneficial. If your current car loan has a 10 percent interest rate and your new loan approval offers a 5 percent rate, you'll save money on interest charges.
Equitable Trade
If your car's trade-in value is higher than your loan's pay off, your vehicle's equity will go toward your new loan amount, reducing its purchase price. You can create equity in your new purchase without having to provide a down payment this way. If you owe $8,000 on a vehicle worth $12,000, $4,000 is reduced from your new car's purchase price in addition to any sales tax savings your state allows. Because of the reduction in cost, you can likely afford a shorter loan term.
Loan Payoff
To obtain a loan approval, your loan provider may require that you trade in your current vehicle if a loan exists because of your debt-to-income ratio. An auto loan provider may decide not to approve your loan while you still have a balance on another vehicle, depending on your credit and income. Keeping your current vehicle or waiting to sell it on your own may not be an option. Auto lenders can view your current loan accounts, including your monthly payment amount, length of account and how much more you have to pay until the loan is satisfied. If you want a second car, apply for a pre-approval before shopping. This way, you can find out if trading your vehicle is necessary.
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