Can you trade in a financed car?

In most instances, yes, you can trade in a car with a loan, and some dealers might roll your remaining balance into a new loan. But trading in your car doesn't make your loan disappear. You will still have to pay off the remaining loan balance that your trade-in amount doesn't cover.

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How does trading in a car with a loan work?

If you want to buy a new car but you're still paying off the loan on your current vehicle, you'll want to do the following:

  1. Find your loan balance: Determine how much you owe on your current financed vehicle.

  2. Estimate your trade-in value: Use the Progressive Car Trade-in Service, Edmunds or Kelley Blue Book to get an estimate of your vehicle's trade-in value. If you can trade in or sell your current vehicle for more than the amount you still owe on it, you've got positive equity. You can use the remaining balance towards the purchase of your new car.

  3. Determine your budget: Use the car payment calculator to determine how much car you can afford to buy right now.

  4. Shop for cars: Whether you're buying a used car or buying a brand-new car, find a few that fit your lifestyle and budget. Progressive has a car shopping service that lets you shop online and get offers and estimates from certified dealers. You can also use the traditional route of visiting dealers first, test driving, and comparing your options in person.

  5. Prepare for your trade-in: Notify your lender that you will be trading in your financed car. Bring all the paperwork related to trading in your car to the dealer, including the title, registration, maintenance receipts, proof of insurance, and your driver's license.

  6. Negotiate and finalize: You can negotiate with the dealer on the price of the new car, and on how much they will offer you for your trade-in. If the trade-in offer won't be enough to pay off your current loan, the dealer or lender may roll the difference into a new loan. Or you may simply have two car loans until your old vehicle's loan is paid off. Request confirmation and paperwork that details how the trade-in and loan payoff process will work.

Trading in a car that's not paid off and has negative equity

If you trade in a car worth less than what you owe on it (typically due to your car's depreciation and your loan interest adding up), it will have something called "negative equity." In other words, you'll still owe money on the vehicle even after you sell it.

When you trade in a vehicle with negative equity, the negative amount from the original loan may become part of your new car's loan (also called rolling over the unpaid balance into the new loan) or part of the negotiation on the price of your new car. Otherwise, you'll need to continue paying your old car's loan until you've paid it in full.

Example:If your loan balance is $12,000 and your vehicle's negotiated trade-in value is only $10,000, the vehicle would have a negative equity amount of $2,000 after your trade-in.

Compare trade-in offers and car prices at multiple dealers to see how much each is willing to offer for your trade-in and your new car. You can use this information to negotiate the best offer, aiming for positive equity or at least a balance of $0 on your old car loan after your trade-in.

If you're concerned about your trade-in's negative equity, speak with your dealer and lender. Verify your remaining loan balance and your options for trading in the car before you get a new one. Otherwise, you could be on the hook for more than you expected.

What happens to a loan when you trade it in?

When you trade in a financed vehicle, the dealer might roll the old loan's balance into the loan for your new vehicle, if that amount is greater than the value of the trade-in. You can also use cash from the trade-in to pay off your old loan or simply continue paying your old loan until it's paid off.

How to trade in a financed car

Trading in a financed car is similar to trading in a car you own, but you need to factor in your current loan. Determine how much you owe on the current loan, estimate the vehicle's resale value to determine whether the equity would be positive or negative, and decide to wait or trade in your financed car from there. If you decide to trade in the car, you'll need to gather the essential documents such as the title, registration, and loan documentation. Learn about whether there's an ideal time to trade in your car.

Does selling a financed car hurt your credit?

Generally, obtaining a new loan affects your credit, so if you are getting a new loan for your new car, your credit score might go down. But it will ultimately depend on your unique credit history and loan details. A non-profit credit counselor can answer your questions about how trading in a financed car might impact your credit score. The National Foundation for Credit Counseling (NFCC) can direct you to a credit counselor near you.

Is it a good idea to trade in a financed car?

Whether it's a good idea to trade in a car with a loan depends on your financial circumstances. If you roll your current loan into the new car loan, your monthly payments will likely increase. You'll have to conclude if it makes sense to trade in a financed car or to wait until you've paid off the loan to purchase another vehicle.

Your options include:

  • Trading it in with the dealer where you plan to purchase the new vehicle

  • Selling it on your own in a private sale, which could get you more money for the vehicle

  • Waiting until you've paid off your current loan

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