Trading in a car is one of the easiest ways to make that switch. All you have to do is select your new vehicle, have your current car appraised, and apply its value to your new car’s purchase price. But what happens if you try trading in a car you still owe on?

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How to Sell A Car That Is Not Paid Off - Trading In An Upside Down Car

Can you trade in a financed car? Of course! Trading in a car with a loan still active happens all the time. It’s estimated that between 50 and 60 percent of vehicle purchases have a trade-in involved. There are two potential situations in this case:

  • Trading in a car with positive equity. When your car’s trade-in value is higher than the amount still owing on the loan, it’s known as positive equity. The trade-in value is used to pay off the loan and the remaining amount is applied to the vehicle purchase.

  • Trading in a car with negative equity. If your car’s value is lower than the trade-in appraisal amount, it’s called negative equity. After the trade-in value is applied to the loan amount, there’s still a balance owing that you’re responsible to pay.

What Happens When You’re Trading In A Car With Negative Equity

What Happens When You’re Trading in a Car with Negative Equity

Many car buyers find themselves in hot water due to negative equity. It leaves you in a vulnerable situation financially. However, the mechanism to do it isn’t just in place – it can be encouraged at many car dealerships.

Here’s how it works:

You get your trade-in vehicle appraised at the dealership. For most car owners, it’s lower than you’d expect to sell your car privately. Taking a low trade-in value is often easier than selling it though because you don’t have to fix it up first, get the state inspection performed, or deal with a frustrating selling process. The dealership does all that.

  • The dealership applies the trade value to your current car loan.

  • If there’s money left after trading in a financed car, the value is applied to the purchase price, usually pre-tax.

  • If there’s a balance still owing on the old car loan after the trade value is applied, you have to find a way to pay it. Or, you can unwind the deal and drive your old car away.

For most car buyers that are trading in a car with negative equity, there are only a couple of choices. You can use your savings to pay off the remaining balance on the loan. But that’s unlikely – most people don’t have that kind of money freely available. Alternatively, you can take out a loan from the bank for the remaining balance or pay it off from a line of credit. This would mean you have a second payment to make aside from your new car payment, and that’s not usually as easy to do as you’d like.

Most often, car buyers trading in a car with a loan choose to wrap the negative equity into the new car’s financed amount. Lenders often allow some wiggle room above the purchase price, and dealerships take advantage of that flexibility to cram as much negative equity into the new deal as they can.

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The Dangers of Negative Equity - How to Not Be Upside Down On A Car

The Dangers of Negative Equity

Trading in a car you still owe on is one thing, but negative equity is another. It’s opening up the potential for money problems.

Think about this: if your new car is written off right after you buy it and you don’t have GAP insurance, you’ll be saddled with two times the negative equity – from your new car and from the balance added to your financed amount!

Plus, if you add negative equity to your new car loan, it can add years of payments and interest that you probably didn’t think about.

Does Buy Cars With Negative Equity?

If you can avoid trading in your car before you’re in a positive equity situation, do it. Even if it doesn’t end up biting you in the backside, it can add stress to the situation and make your car payments higher than you’re comfortable with.

The worst-case scenario? You could write off your new car and be stuck with thousands of dollars in negative equity, and no car to show for it!


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