Can You Trade in a Financed Car?

If you’re looking to trade in your car, you may wonder if you can do so if you still have a loan outstanding on the vehicle. The good news is that, in most situations, you can trade in a financed car. Here’s how it works.

When you go to trade in your car, the dealership will pay off the remaining balance on your loan. They will then apply your equity in the car towards purchasing your new vehicle. If you owe more on the loan than the car is worth, you may still be able to trade it in, but you may have to pay the difference out-of-pocket or roll the negative equity into your new loan.

When trading in a car you still owe money on, it’s essential to research and understand the implications. In addition, weighing all your options before committing to either route is important, as this will help ensure you get the most value out of your vehicle

Let’s take a closer look at the different considerations involved in trading in a financed car and what you can do to ensure you get the best deal.

Table of Contents:

What is a trade-in?

A trade-in is when you use your current vehicle as collateral toward the purchase of a new car. You essentially hand over the keys to your old car to the dealer, who then uses that car to lower the price of the new car you’re buying. In this process, your previous loan is paid off, and any equity you may have in your car is applied toward the price of the new vehicle.

Sometimes, trading-in a car can give you less money than what you would get if you sold the car outright — so if getting top dollar for your old car is a priority, trading it in might not be the first option to explore. However, in order to be sure, you need to take a few steps.

Person holding a mobile phone in hand and scrolling on the screen. Information is about finding out what your car is worth which is in the text below

Find out what your car is worth

Before trading in your car, it’s essential to know precisely how much it’s worth. The trade-in value is not the same as the retail value, so don’t walk in thinking that’s what the dealership will offer for your car. The trade-in value is generally closer to the wholesale price the dealer will give you for your vehicle. However, the retail value is higher and would be what you could expect to get if you sold your car yourself.

That said, knowing the retail value of your vehicle is still important because it will give you a better understanding of the equity you have in your car.

There are a few different ways to determine your car’s trade-in value. One is to use an online tool like Edmunds’ Trade-In Marketplace or Kelley Blue Book’s Trade-In Calculator. You can also check “black book” values at sites like NADAguides

Get the most for your trade-in

Once you know the trade-in value of your car, it’s time to start thinking about how to get the most for it. Remember — the dealer’s goal is to make money on the sale of both the new car and the trade-in, so they’re not going to give you top dollar for your current vehicle. However, that doesn’t mean you can’t negotiate a reasonable price for your trade-in. Here are a few tips:

Hand flipping through a roll of 100 dollar bills. The text is informing readers how to get the most out of a trade in and is the same as the text in the story below
  • Research recent sales of similar cars in your area to see what they sold for. This will give you a good idea of what dealers currently pay for cars like yours. 
  • Get multiple appraisals from different dealerships. This way, you can compare offers and see who will pay the most for your car. 
  • Be prepared to walk away from any offer that isn’t satisfactory. After all, if they’re not willing to give you a fair price for your trade-in, there’s no reason why you should buy a car from them anyway. 

Additional recommendations for earning top trade-in dollar on your car include:

  • Repair any minor damage to the vehicle, including dings, scrapes, and scratches.
  • Have the car washed and detailed so it looks its best.
  • Provide any relevant service records to prove that the car has been well-maintained.
  • Remove any aftermarket accessories or modifications if possible.

Know your remaining loan balance

The next step is determining how much you owe on your current loan. If you’re unsure of your remaining balance, contact your lender and request a payoff quote. This will tell you exactly how much money needs to be paid off for you to trade in or sell the car. 

It’s important to understand where you stand on principal vs. interest payments on your loan. If you haven’t paid much of the principal, you’re mostly paying off interest charges, which will impact how much equity you have in your car. 

Calculate the equity on your vehicle

Now that you know what your car is worth and how much you still owe, you can calculate the amount of equity you have in the car. To do this, subtract the remaining loan balance from the car’s trade-in value. If you have negative equity in the car, you still owe more than what it’s worth. 

  • Trading in a financed car with positive equity – This is a good position to be in. It means you have some equity in the car, which you can use toward purchasing a new vehicle. In this situation, your new auto loan will be lower since it will only need to cover the difference between your car’s trade-in value and the amount of your new car purchase. 
  • Trading in a financed car with negative equity – This is not ideal, but it’s still possible. In this case, your new loan may need to include some of the remaining balance on the old loan to cover the entire purchase price of the new car. Be aware that this can lead to higher monthly payments and more interest charges, so it’s important to make sure you understand all the terms before signing anything. 
Photo of hands placing a for sale sign on the windshield of a car that is parked
For sale sign on windshield of car.

Should I trade in my financed car or sell it privately?

When you’re looking to upgrade to a new car, you may wonder if it’s better to sell your old car privately or trade it in. While both options have pros and cons, the decision ultimately comes down to what makes the most financial sense for you. Using the information you’ve gathered throughout this guide, you can make an informed decision and get the best value for your vehicle. 

If you decide that trading in your financed car is the right choice, it’s important to be prepared and do your homework. By researching recent sales prices, getting multiple appraisals, and understanding how much is owed on your car loan, you can maximize the value of your car and get the best deal possible. But if you’re still unsure, here are some considerations to help you decide.

When to trade in your car

There are a few scenarios where trading in your car makes more sense than selling it outright. For instance, if you’re upside down on your loan (meaning you owe more on the loan than the car is currently worth), trading in your vehicle can help you avoid having to come up with extra cash at closing. Additionally, trading in your car can help simplify the car-buying process by allowing you to take care of everything at one dealership. And lastly, if you’re interested in taking advantage of special offers or promotions, trading in your car can be a great way to help you save money on your next purchase. 

When to sell your car privately

On the flip side, there are a few scenarios where selling your car outright makes more sense than trading it in. For starters, if your car is nearly paid off and has no major mechanical issues, you’ll likely get more money by selling it yourself than by trading it in. Additionally, if you’re not planning on buying another vehicle right away or don’t have a specific model in mind, there’s no rush to trade in your old car. You can always do it later down the road. Finally, if time isn’t an issue and you don’t mind putting in a little extra effort, listing your car online or through classified ads will give you more control over the sales process and could net you a higher return than trading it in to a dealership.

Remember that privately selling a financed car comes with its own challenges, so it pays to do your research before committing to either option. The biggest one concerns the title. In most cases, you’ll need to have the title in hand before selling your car privately, so you’ll first have to pay off the remaining loan balance. This is a challenge for many people who don’t have access to personal loans or lines of credit from a bank or other lenders. But if you have the funds available and don’t mind taking on the extra effort, selling your car privately can be a great way to maximize its value. 

Photo of two people holding hands and driving down the road in a convertible. Text on the image is about when someone should trade in a car but is listed in the story below

Is there a good time to trade in a car?

If you’re currently driving a car you financed, you may wonder if it’s the right time to start looking for a new one. After all, every car has a limited lifespan, and sooner or later, you’ll need to replace it. So the question is — when is the best time to do that?

There’s no easy answer to that question since there are a lot of factors to consider.

When your car is getting old

One of the most apparent times it makes sense to trade in your car is when it’s getting old. All cars have a limited lifespan. Eventually, they’ll reach a point where they’re no longer desirable, and dealerships will not offer you much, if anything, for them. Cars over 10 years old and with more than 100,000 miles are unlikely to be worth much on the used car market, so if trading it in is in your future and you’re halfway to either of those benchmarks, it may be wise to start researching and shopping for a new car sooner rather than later.

When interest rates are low

If you’re considering financing a new car, timing is everything. Interest rates on auto loans fluctuate just like any other type of loan, so getting a low rate can save you thousands of dollars in the long run. So keep an eye on interest rates and time your purchase accordingly. It’s also a good time for auto refinancing if you’d rather keep the car you have but are looking for a lower rate. To see if this is a better option, use our refinance car loan calculator

When there’s high demand for used cars

Another thing to consider is the demand for used cars. Believe it or not, there are specific periods when used cars are in higher demand than others. For example, when supply chain issues and wait times for new vehicles stretch out, there is often increased demand for used cars. Knowing when the market is hot can help you get a better price for your car if you choose to trade it in. 

Final Thoughts on Trading in a Financed Car

So, can you trade in a financed car? Yes, you can, but it’s essential to research and understand the implications of trading in a vehicle that you still owe money on. It pays to weigh all your options before committing to either route, as this will help ensure that you get the most value out of your vehicle. 

Are Auto Loans Fixed or Variable?

When you take out an auto loan, your interest rate is typically fixed. However, there might also be the option of a variable interest rate.

Most consumers will choose a fixed rate for their auto loan financing because it offers predictability and stability when budgeting for their monthly payments. Fixed rates are also provided by more lenders, banks and credit unions than variable rates.

However, a variable interest rate could also offer some benefits, especially if interest rates are low when you first take out your loan. In addition, variable rates are potentially advantageous if you don’t plan to keep the vehicle long-term or don’t plan on holding the loan for an extended period.

Here’s what you need to know about both options.

What Are Fixed-Rate Auto Loans and Their Benefits?

A fixed-rate auto loan is based on an interest rate that does not change over the life of a loan. This applies to new loans and those who refinance their car loans. This type of interest rate is the most popular for car loans and is often used for mortgages and personal loans as well.

One of the best benefits of a fixed interest rate is that it makes budgeting easier. You know exactly how much your monthly payment will be, so you can plan accordingly. This predictability can be a big help when trying to add a second vehicle to your household, take on other large financial obligations or simply make ends meet.

woman sitting at desk, using a calculator and smiling

Another benefit of a fixed interest rate is that it protects you from changes in the market. You’re locked in at the lower rate if interest rates go up. But, on the other hand, if rates go down, you’re still stuck with the same payments and forfeit those potential savings.

That said, the biggest downside of a fixed interest rate is that you might end up paying more in interest over time if rates drop, especially if locked in at a higher-than-average rate to begin with. For example, according to research, Americans are paying up to 25 % more for their car loans than they were 10 years ago. So it’s essential to be informed, so you can make the best decision for your individual circumstances. If you do have a fixed rate car loan and the interest rates drop, you can always look into refinancing to lower your interest rate.

What Are Variable-Rate Auto Loans and Their Benefits?

A variable-rate auto loan is based on an interest rate that can change over time in response to market conditions. This movement is tied to an index or benchmark, such as the prime rate. Variable interest rates are also called adjustable interest rates and floating interest rates.

The biggest benefit of a variable interest rate is that it could save you money. When interest rates are low, you could get a lower monthly payment. Additionally, you can take advantage of falling interest rates without having to refinance. However, keep in mind that refinancing could still be an option. If that interests you, check with a refinance car loan calculator to see how much you could save.

If interest rates are unusually high when you purchase your vehicle and are predicted to fall, you might want to consider a variable-rate loan. In this case, you would be “betting” that interest rates will go down, which could save you money in the long run. This would require following governmental interest rate statistics and having both a sense of the market and an understanding of the risks.

stacking coins with percentage symbol over each stack

Of course, the biggest downside of a variable interest rate is that it could go up, resulting in a higher monthly payment. If this happens and you can’t afford the new payment, you might be forced to sell the car or default on the loan, which could hurt your credit score.

In addition, if rates rise sharply and you can still afford payments, you could end up with negative equity, where you owe more on your loan than the car is worth.

Nonetheless, a variable interest rate could be a good choice if you’re planning on selling the car or refinancing the loan within a few years, and interest rates are both low and steady. It could also be a good option if you’re comfortable with a little more risk in exchange for the potential to save money.

How Do You Know Which One Is Right for You?

The best way to decide whether a fixed or variable interest rate is right for you is to consider your plans for the future. For example, a fixed interest rate could be the best option if you plan on keeping the car for a long time and the current interest rates are low. This way, you lock in the low rate and don’t have to worry about market fluctuations.

On the other hand, if you’re not sure how long you’ll keep the car or if you think interest rates could go down, a variable interest rate could be the best option. However, remember that there’s more risk involved, so you need to be comfortable with that before choosing a variable interest rate.

Whichever option you decide to go for, be sure it’s the best fit for your individual circumstances.

How to Calculate Interest on a Car Loan

Buying a car is a significant financial commitment. In fact, car loans are the second largest financial commitment most people will make (the first being a home mortgage). Learning how to calculate interest on a car loan will help you sift through your options and choose the loan terms that are best for you and your budget.

The Elements of a Car Loan

When calculating how much interest you’ll pay on your car loan, you’ll need three pieces of information:

Amount of loan: Whether you are seeking a new loan or refinancing your existing car loan, you will need to know the exact amount that you will be financing, including the price of the vehicle and taxes, as well as any add-ons that you’ve chosen, such as a GAP waiver.

Your interest rate: When you apply for an auto loan, your lender will use information from your application to determine your interest rate. Interest rates depend on several factors, including economic conditions, as well as your credit score, income and the age of the car that you purchase. Some lenders use other criteria in determining your rate, which could include your educational background and work history.

Length of repayment: You’ll need to know the length of your repayment period. Auto loan terms are expressed in months instead of years, and auto loan terms typically range from 24 to 84 months, though other terms might be available.

Magnifying glass over percentage signs

Calculating Your Monthly Interest Payments

Car loans are amortized, which means that you’ll be paying your loan balance off in installments. This means that the interest you pay over the duration of your loan will be based on an ever-declining principal balance. Because your principal balance changes each month, so will the amount of your interest payment.

If you want to know what you are paying in interest each month, you’ll need to do the following:

  1. Begin with a straightforward calculation: Your interest rate (percentage) divided by how many payments you’ll make on the loan annually.
  2. When you have that number, multiply it by your loan’s balance.

This calculation will give you the amount of interest you’ll be paying each month. It’s important to note that this number reflects only the amount of interest you’ll pay that month. This will change each month during the duration of your loan repayment period.

Another thing to remember is that your monthly interest payment is only one portion of your monthly car loan payment. The other portion is what you are paying against the loan balance.

If you aren’t a numbers person and all this seems too complicated, you can check out the AUTOPAY refinance car loan calculator to get a quick calculation, plus your estimated savings if you opt to refinance at a lower rate.

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Other Factors That Determine Affordability

If you’ve run these numbers and are experiencing a bit of “sticker shock” at how much interest you are (or will be) paying each month, keep these things in mind:

  1. As you pay down your loan, the percentage of each payment that goes toward interest decreases over time. This is because the amount of interest you pay is based on your loan balance. As the balance shrinks, so does the interest.
  2. There are things you can do to reduce the amount of interest you’ll pay on a loan. These include improving your credit score by making timely payments and paying down existing debt, buying a new car instead of a used vehicle and, if necessary, finding a co-signer for your loan.
  3. The larger your down payment on a vehicle, the smaller your balance will be. This can significantly reduce your interest payments.

Taking out a car loan or refinancing an existing loan can be a challenge, particularly when it comes to understanding your total costs. Make sure to shop around to get the loan you need with terms that you can afford.