When trading in an automobile, you have many options. You can trade in a vehicle you own out-right, with the trade-in value applied toward the purchase of a new vehicle, or you can trade in a car you are financing. If you are "upside down" in your loan, you will need to pay off the difference between what you owe and what the vehicle is currently worth, or in some cases, you may be able to roll the overage of the loan balance into the loan for a new vehicle.
Determine the Value of Your Vehicle
Before trading in a vehicle you're currently financing, ask your finance company exactly how much money is left on your note, then determine the current fair market value of your vehicle and calculate the price difference. It can be a bit subjective determining the value of a vehicle, as several factors are taken into consideration, including the model, year, mileage and condition of the vehicle. Kelley Blue Book is the most commonly used guide for determining the fair market value of a used car or truck. Available as a free, online tool, the Kelley Blue Book calculator allows you to input the specifics of your vehicle to determine a fairly accurate estimated value.
Determine Your Overage
Once you know how much your car is worth and what you owe on your loan, you'll have a figure to work with. For example, if you owe $5,000 on a car that has a trade-in value of $3,000, you will be responsible for the remaining $2,000 balance. You can pay off the loan amount, trade in the fully paid-off vehicle and secure a new loan, or you can roll the extra $2,000 into a new loan. Using this same example, if you want to purchase a new vehicle worth $25,000, with the outstanding $2,000 you own on the first loan, your new loan will be $27,000.
Benefits of Trading in a Financed Vehicle
In some instances, you may find it worthwhile to trade in a financed vehicle for a new one, even if the result is a higher new loan amount. If you are able to obtain a better interest rate, purchase a new vehicle with high gas mileage or unload an under-performing, high-maintenance vehicle, the extra cost may be more beneficial in the long run.
Drawbacks of Trading in a Financed Vehicle
If you trade in a financed vehicle with a substantial loan balance, move into a higher interest rate than you previously held or take on a new loan with longer terms, you may be spending much more than you realize over the life of the new loan. For best results, take into consideration your loan balance, interest rate and loan term and weigh the variables before making a final decision.
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