Can you trade in a financed vehicle?

7 minute read Published on Apr 21, 2024 by BrokerLink Communications

Stylish woman wearing an orange shirt and driving a car.

If you plan on buying a new or used car but already have a vehicle, you might be wondering if you can trade it in. The process works differently depending on if your vehicle is financed or if you own it outright, with the former being a bit more complicated. Below, we explain how trading in a financed car works and some tips to ensure a smooth trade-in process.

How to trade in a financed vehicle: An overview

If you wish to trade in a financed car, you must consider one main factor: your car loan. Specifically, you should use an auto loan calculator to determine if you still have any outstanding loans that must be paid off.

If you still have outstanding debts, you will need to compare the car's trade-in value with the remaining loan amount. If the vehicle's trade-in value is higher than the remaining loan amount, then the process will be relatively straightforward. The remainder of the loan will be put toward purchasing the new car.

However, if the car's trade-in value is not enough to cover the outstanding loan, then the process is known as negative equity, and it is more complicated.

Steps to trading in a car that is not paid off

There are several reasons that a person might decide to trade in their financed vehicle, even if the car loan for that vehicle isn’t paid off. That said, there are several factors you should consider before doing so. Reach through the steps below to learn how to trade in a car that isn’t fully paid off:

1. Calculate your remaining car loan amount

The first step to trading in a car that isn’t paid off is to calculate your remaining loan amount. For some people, this calculation could be as simple as adding up the remaining payments due for the loan term. However, the calculation may be more complex for others, including other fees like early repayment penalties or interest. If you’re having trouble determining your remaining car loan amount, use an auto loan calculator, many of which you can find for free online, or contact your lender directly and request a payment amount.

2. Determine the trade-in value of your car

Step number two is to determine the trade-in value of your car. It’s best to do some independent research into your car’s trade-in value rather than simply taking the dealer’s word at face value. To estimate your car’s trade-in value, you will need to consider several factors. These factors include your car’s age, make, model, and condition. Market demand may also come into play, so you want to ask a professional for help when evaluating your car’s value.

3. Know what auto loan equity means

The next step to trading in your financed car is understanding what auto loan equity is. This is crucial if you want to make the best possible decision for your needs. Positive equity is when your car is worth more than the outstanding amount on your auto loan. For example, if the dealer tells you that your car is worth $20,000 and your current loan balance is only $5,000, then you will have $15,000 in positive equity. Please note that if your car is not currently paid off, then positive equity won’t apply to you.

On the flip side, there’s negative equity. Negative equity is what will apply if you still have an outstanding car loan. Negative equity is any time that the loan value is higher than the estimated trade-in value of a car. Negative equity loans may also be referred to as upside-down loans. Negative equity loans put borrowers further into the hole of debt because the difference between what they still owe and the value of their car is added to the purchase price of the car they want to buy. A new loan is then issued for this higher amount, which translates to higher monthly auto loan payments for the borrower.

4. Prepare the necessary documents

If you have a negative equity loan but decide that you want to proceed with the trade-in, then it’s time to prepare the necessary documents. Since a vehicle trade-in and a new auto loan are both legal transactions, you must provide a range of documents.

These include car registration documents, personal identification, including your valid driver’s licence, and information that shows proof of income. This part is for the auto loan that you are obtaining. Your lender will want to see evidence of income in some form, such as a pay stub, notice of assessment, and bank statements. You must also show proof of residency if you are not a Canadian citizen.

5. Read through the auto loan contract carefully

The final step is to review the auto loan contract given to you by your lender. You should always read any legally binding contract carefully. If you are confused by the legal jargon and terminology, have an attorney review the contract for you. Generally speaking, you should be wary of any dealership that promises to pay off the negative equity on your old car. If it sounds too good to be true, it probably is. Plus, it’s nearly impossible to get out of paying the debt that you owe, even by trading in a vehicle.

Lastly, if the offer presented to you doesn’t feel fair or doesn’t reflect the discussions you’d had previously with your lender, you are not obligated to sign on the dotted line. Do not feel any pressure. Instead, take some time, shop around, and compare your rates. This is the way that we recommend you shop for car insurance, and it’s also the way we recommend you shop for an auto loan. Don’t rush; this is a critical process.

6. Buy car insurance

Finally, if you decide to go through with the trade-in, make sure that you update your existing car insurance plan so that your new vehicle is covered. There is a grace period in Alberta and other provinces, but it’s still a wise choice to let your insurance company know about the vehicle change as soon as possible.

Trading in a car with negative equity

If you want to sell your car by trading it in, but the trade-in value is not more than the amount of the loan you still owe, you will end up with a negative equity loan. The good news is that you can still trade in your financed car with a negative equity loan. The bad news is that the difference between the trade-in value of the vehicle and the remaining loan will be added on top of the original loan. This means that your debt will be even more significant, and as with any auto loan, you are still responsible for paying it off.

To clarify how a negative equity loan works, look at the following example: Suppose you have an auto loan with an outstanding balance of $15,000. You visit your local car dealership and tell them you wish to trade in your financed car. Your dealer assesses your vehicle and says they can only offer you $10,000, but the car you hope to buy is $30,000. If you decide to proceed with trading in your financed car, the dealer would then subtract the trade-in value they offered you $10,000 from the outstanding balance of your loan $15,000.

This would leave you with $5,000, which would then be added to the $30,000 purchase price of the new car. From there, the dealer will calculate your new auto loan payments based on the numbers added together. In this case, the car loan payments would be based on a total of $35,000.

Should I trade in a car with negative equity?

Generally speaking, experts do not advise trading in a car with negative equity, especially if you have a high amount of negative equity. While each situation is unique, taking on more debt is typically not advisable, especially if you’ve had difficulty keeping up with your current car loan payments. However, you may need a bigger vehicle or a newer, more fuel-efficient vehicle, in which case you may need to complete a trade-in.

How can I increase the value of my car?

Rather than focusing on increasing the trade-in value of your car, it’s a smart idea to focus on paying off your debt as quickly as possible. This way, even if the trade-in value doesn’t increase, you could still achieve a positive equity loan by reducing the outstanding debt.

Generally speaking, it takes most drivers approximately two years to reach the break-even point on an auto loan, assuming you are financed with zero down and your car is in average condition. After this two-year mark, you should be able to start building positive equity.

Where to trade in a financed vehicle

Wondering where to trade in a financed vehicle in Canada? Car dealerships are the most popular option due to their convenience. In most cases, when you agree to trade in your financed car for one a dealership offers, the dealership will handle the financials. Dealerships are used to accepting used cars. In fact, a significant portion of most dealerships’ profits are used car sales. However, if the dealership has trouble selling your car to a new owner, they can choose to wholesale the vehicle or they can list it at a car auction. These options are usually reserved for ancient cars or those in poor condition.

Can I trade in a leased car?

It depends. You should check with your leasing company about the terms and conditions of your lease term. Sometimes, trading in a leased car may not be financially beneficial.

Contact BrokerLink

Here at BrokerLink, we are experts in all types of auto insurance, and that includes both mandatory and optional coverage like:

Thus, no matter what type of policy you’re looking for, we can help you find it. By comparing quotes from a range of providers, you can rest easy knowing you’re getting the best coverage at the most affordable price. Reach out to BrokerLink to get a free car insurance quote now.

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