Dealers take vehicles for trade even if a current loan exists. However, you may face difficulty when applying for a new loan if you owe more than your vehicle's value, known as being upside down. Before you decide to trade your financed vehicle to a dealer, consider the process and whether it benefits you financially to do so.
Trade Process
Even with a financed trade, you can shop for a car as normal. Your salesperson will ask if you want to trade in your vehicle. In most cases, you can pick out a vehicle to purchase and allow the dealer to appraise your trade. When a loan exists, your salesperson calls your lender for the loan's payoff amount. Your trade value and loan payoff are considered in your new purchase price and loan payments if you plan to use the dealer for financing. Once you agree to the purchase, the dealer quickly pays off your old loan to take ownership of the car.
Equity
If you owe less than your vehicle is worth, any credit goes toward your new purchase. For example, if you buy a $20,000 vehicle, but have a trade worth $10,000 and a loan balance of $8,000, $2,000 is deducted from your vehicle purchase, similar to a down payment. However, most states offer a tax deduction when a trade exists, so expect a tax break. In this same scenario, expect to pay tax on $10,000, not the purchase price. Most states recognize that you already paid tax on a trade.
Negative Equity
If you owe more than your car is worth, the negative balance is transferred to your new purchase price. This can cause issues with a new finance. Banks offer loans based on a vehicle's market value, so without rebates (for a new car purchase) or dealer discounts, you may have to put money down to correct the loan and value amount. Lenders also use your credit standing to decide your loan-to-value ratio, so if you have excellent credit, the bank may extend up to 120 percent of the vehicle's value. Transferring a balance creates a negative equity purchase. Use a down payment to avoid carrying over money.
Other Options
You can sell your vehicle on your own to make more money, even if the vehicle has a loan balance. Call your bank for the loan's payoff amount and sell your vehicle to pay your lender. Dealers offer wholesale value for trade cars, which is thousands less than you can make from a private sale. Selling the vehicle on your own can decrease the amount of money you need to put down toward a new purchase. Expect to pay your lender the difference between the vehicle sales price and payoff amount. This amount should prove less than the difference between wholesale value and the loan payoff amount.
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