You can trade in a vehicle if you still have a lien on it. A dealer must satisfy your lien holder when it takes your vehicle for a trade-in, but it can be handled in different ways, depending on your preference and the value of the vehicle. Most states also offer a tax deduction for trade-in vehicles, which can save you money.
Dealer Payoff Process
When you trade in your financed vehicle, your salesperson or another dealer representative must call your lender to obtain your exact payoff amount. Once you agree to a value on your trade-in, the dealer will present you numbers showing your trade-in value, payoff amount and new vehicle pricing. When you sign your purchase paperwork, you must bring your title and sign it over to the dealer unless you live in a state that sends the title to the lien holder. Expect to sign paperwork that authorizes the dealer to pay off your loan balance and any title transfer paperwork your state requires.
Owing More Than the Vehicle's Value
When you owe more than your loan payoff amount, known as being upside-down in a car, the excess loan balance transfers to your new car's purchase price. You can choose to finance the extra amount, if you prefer, or offer a down payment to decrease your negative equity. The dealer will still pay off your entire loan balance. A dealer must satisfy your loan in order to own the vehicle outright and resell it to another person.
Owing Less Than the Vehicle's Value
If the dealer appraises your vehicle for more than your loan payoff amount, the credit goes toward the new car's purchase price. For example, if you owe $8,000 on a vehicle appraised at $10,000, then the additional $2,000 comes off your new car's purchase price in addition to any manufacturer incentive or discounts. You can use the extra amount as your down payment. Depending on your state, you might also receive a sales tax deduction, which reduces your sales price even more.
Down Payment and Tax Deduction Consideration
If you're upside down in your current car loan, consider providing a down payment to cover your negative equity. Otherwise, you might remain in a negative equity position and find you cannot sell your vehicle or trade it in the future without providing a down payment. Many states also offer a tax deduction for trade-in vehicles. If you live in a state that offers a sales tax deduction, your trade value is reduced from the vehicle's taxable sales price before tax is applied. For example, if your trade is worth $8,000 and you purchase a vehicle for $10,000, you'll pay sales tax on only $2,000 instead.
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