Can you trade in a car you just bought?

No length of time restricts you from trading in a newly purchased vehicle. However, trading in a new vehicle may be a waste of money. The depreciation that occurs when you leave the dealership means your trade-in will have less value than a new vehicle, even though it's practically new. If you trade it in, you must pay the difference between what you get for the trade and how much your new car costs.

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How long do you have to wait to trade in a car you just bought?

There is no required time to wait to trade in a car. Ideally, you might wait until you've paid off your loan or at least have positive equity before you trade in your car. Otherwise, you're almost certain to lose money on the deal. That's because a car loses value when you drive it off the lot, and its status instantly changes from "new" to "used," making it far less valuable to dealers. In addition, if you financed the car, trading it in doesn't make the loan go away.

How does trading in a car work if you still owe on it?

If you're trading in your financed car that's brand new, the dealership will give you an amount they feel is appropriate based on the vehicle's make and model, its condition, and market demand. Because the dealership needs to profit from the vehicle, it's unlikely that you'll receive an amount equivalent to what you paid. Once you accept the dealer's offer for your trade, the dealership will work with your lender and pay off your original loan using the value of the vehicle you've traded.

If there's a remaining balance, the dealer will roll it into the loan on the new vehicle purchase. Your new loan will include the unpaid balance from your original loan resulting in higher monthly payments and a longer repayment period. Then, you'll sign the paperwork for the new loan. Ensure that you clearly understand the terms of the new loan, the interest rate, the loan duration, and the total cost of the new loan.

The dealer takes care of the paperwork involved with transferring the title of the trade vehicle into their name and the title for your new vehicle into your name.

Understanding positive vs. negative equity

You have positive equity when a trade-in vehicle is worth more than the remaining loan balance. A new vehicle will lose value when you drive it off the lot. However, if you find that you have positive equity, you can apply these extra funds toward the purchase of another vehicle. It often makes sense to wait to trade in your new vehicle until you have positive equity. Otherwise, you might end up with even more debt than you went into the deal with.

Example:For example, if the vehicle is worth $20,000, and you only owe $19,000, you would have a positive equity of $1,000 to purchase another car.

But if the car is only worth $15,000, you'd have a negative equity of $4,000. That means you'd still owe $4,000 on it after your trade-in, which would be on top of the cost of your new car.

How long do you keep your car before selling?

Although you don't have to wait to trade in a new car, it's often a good idea to wait until any existing prepayment penalty has expired. According to Cars Direct, prepayment penalties discourage buyers from paying off their loan early, which allows the lender to collect all the interest. Cars depreciate quickly in the first five years, but the most rapid depreciation occurs within the first year of ownership. Use our car depreciation calculator to estimate how much your vehicle could decrease in value each year.

What if I just bought a car and want to trade it in?

You can trade it in. There are no federal laws that say dealers must allow returns of vehicles. If you buy a new car and find it isn't the right fit, your only option may be to trade it in.

However, if the car doesn't work properly or is defective, the car may be considered a lemon. Lemon laws, which vary by state, may allow the dealer or manufacturer to reimburse you if the vehicle has mechanical faults that make driving unsafe. Lemon laws don't apply if you don't like the vehicle.

Take advantage of test driving a vehicle to ensure you like a car before you purchase it. Some dealerships even offer overnight test drives. Take the time to research the make and model and learn about others' experiences and what maintenance looks like further down the line. Buying a car is a major commitment; knowing what you're getting before you sign the paperwork pays. You can take your time shopping, and you can even compare offers and trade in your car online with Progressive's Car Shopping Services by TrueCar.

Should I wait before trading in a new car?

You're not required to wait before you trade in a new car, but you might want to wait at least until you have positive equity. Having negative equity makes trading in a vehicle more costly. But even if it's not the best time to trade in a car, you can still do it. If you want to trade in a financed car and owe more than it's worth, the dealer may roll the unpaid loan balance into your loan for the new vehicle. Understand that this will also increase your monthly payments. Get strategies for lowering your car payment.

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