Trading in a car with a loan is possible even if you still owe money on your vehicle. When trading in a car with a loan, the remaining balance is simply included in the transaction.
Many drivers believe that they should completely cover their car before trading in. In trading a financed vehicle, the balance on your loan is just factored in the transaction.
When you visit a dealership, two numbers matter: how much your vehicle is worth and how much you still owe on your loan. The difference between those numbers determines whether you have positive equity or negative equity.
When your vehicle is valued higher than the balance of your loan, then you possess a positive equity. As an illustration, a vehicle worth $25,000 with a remaining debt amount of 18,000 will have a positive equity of 7,000. You can use that to pay down on your next car and this will allow you to finance less.
When you owe more than the value of your vehicle, then you have negative equity. As an illustration, when you own a car worth 20,000 and you still owed 27,000, you had 7, 000 negative equity. That leftover is usually included in the financing of your next car.
What Actually Happens to the Remaining Loan?
When you trade in your vehicle, the dealership contacts your lender directly and requests the exact payoff amount. After the transaction is made, the dealership clears the outstanding balance of your current loan. You no longer continue making payments on your old vehicle.
In case you have positive equity, that will be used against your subsequent purchase. In case of negative equity, they tend to roll up the difference in a new loan.
To illustrate, suppose that your car is valued at 22,000 dollars yet you have a debt balance of 26,000 dollars. The dealership pays off the entire $26,000 to your lender and the rest of the 4,000 is part of the financing of your new vehicle.
How Trading In a Car With a Loan Works
Yes. A lot of Canadians sell their cars even when they have outstanding debts.
Negative equity occurs particularly when you have recently bought the vehicle or have financed the vehicle and have a longer term of payment, paid a low down payment or when the vehicle has depreciated at a high rate.
Trading in with negative equity can still make sense if you need a different vehicle, lower payments, or want to switch into something more reliable. However, because the remaining balance is added to your next loan, your monthly payment may increase.
When deciding, you should consider the balance on your loan, your actual trade-in value and the price of the new car.
The Canadian Black Book or AutoTrader Value Tool are the tools that you can use to estimate your trade-in value.
Is It Better to Trade In or Sell Privately?
Trading in is generally less complex when you still have money to pay on your car.
Privately selling can get you more money in the sale of your vehicle but you still have to pay off the loan before you can transfer the ownership to the new owner. This can require that you go out and deal with your lender and do additional paperwork yourself.
Trading in is typically less difficult since the dealership does the loan payoff, the transfer of ownership and the paperwork. It may also simplify the process of transferring to your next car, and paperwork for you. It can also make it easier to move directly into your next vehicle.
If you want to compare both options in more detail, read our related article on the tax benefits of trading in your car vs. selling it privately. You can also read our guide on how to sell a financed car in Canada. For more information about how car loan payoffs work in Canada, you can also visit the Financial Consumer Agency of Canada.
How to Tell If You Have Positive or Negative Equity
The easiest way to calculate your equity is to subtract your remaining loan balance from your vehicle’s trade-in value.
If the result is a positive number, you have positive equity. If the result is negative, you have negative equity.
To illustrate, in case your car is valued at 30,000 and you owe 24,000, then your equity is 6,000. If your vehicle is worth $22,000 and you owe $28,000, you have negative equity of $6,000.
Being aware of this figure before you go shopping will enable you to know your budget and what to look forward to when funding your next car.
At Planet Motors, we can assist you to identify your trade in value, check your balance of your loan, and demonstrate to you what your next payment would be like prior to deciding.
Frequently Asked Questions
Yes. You can trade in a financed car even if you still owe money on it. The dealership will contact your lender, determine the exact payoff amount, and pay off the remaining balance as part of the transaction.
If you owe more than your vehicle is worth, you have negative equity. In many cases, that remaining balance can be added to your next car loan, subject to lender approval.
It can. Because the unpaid balance is added to your new loan, your monthly payments may increase and you may pay more interest over time.
Yes. It is still possible to trade in a vehicle if you have bad credit. However, lender approval, interest rates, and whether negative equity can be rolled into your next loan will depend on your credit profile and income.