How soon can you trade in your car after buying it

At a Glance: Identifying the approximate market price of your vehicle will help you get an idea of what a dealer would bid. Certain online sites can help you predict your car’s trade-in value.

At a Glance: There is no strict limit on the amount of time you have to wait to trade in a financed car. If you owe more on the loan than the car is worth, however, you’ll have to take out a larger auto loan for your new car to make up the difference or pay off the difference immediately.

Is it possible to trade in a vehicle that has been financed? Yup!

However, you should be aware that exchanging a financed vehicle would not eliminate the loan. You will still be responsible for the remaining amount.

Most dealerships will present you with several options, depending on whether you have positive or negative equity, as well as how you plan to cash in a vehicle with a loan balance.

Can You Trade In a Financed Car?

Yes. Even though you are already paying the loan on your vehicle, you can swap it in for a new one. The person who takes your car off your hands will give you money in exchange, as much as any other trade-in.

In some situations, the lump sum would cover the outstanding amount on your debt, and you might even get a little extra that you can put toward your next purchase!

But first, you need to figure out how much equity you have in the car. Equity is the difference between the present valuation of your vehicle and the balance you owe on your debt. You have positive or negative equity based on those two variables that we will soon discuss.

How Long Do You Have to Wait to Trade In a Financed Car?

A financed vehicle can be traded in at any time, but you would want to wait a year or so if you have purchased a new car. Automobiles lose value over time, and a brand-new car will lose 20% or more of its value in the first year of ownership, steadily losing more in subsequent years.

Depending on the extent of your down payment and how easily your car has depreciated, you can find yourself in a situation where you have negative equity in the vehicle almost instantly.

Understanding Positive and Negative Equity

You have negative equity, also called being “upside-down” or “underwater” on your car loan, if the value of your vehicle is less than what you owe on it. You will have to compensate for the gap between the debt balance and the trade-in value by trading in a car with negative equity.

If you plan to trade in a car with negative equity, you will need to figure out which choice is better for you.

Consolidate Your Negative Equity Into a New Car Loan

While this option may be easy, it raises the cost of the current loan, which means you may end up paying more in interest for the loan. This choice typically involves borrowing more money than what your new vehicle is worth, putting you at a higher risk of falling into debt again.

Pay the difference between the amount of your trade-in and the debt you owe.

You will be able to afford the difference between what you owe on your new debt and what the broker is paying you on your trade-in if you have the cash on hand. This will help you drive the cost of a new loan down.

Postpone the Trade-In

You may want to hold off on trading in your car until you have paid off your loan or are no longer in debt.

Positive Equity

The positive difference between the value of your vehicle and the balance you owe on your loan is referred to as positive equity. Let’s say your car is worth $8,000 as a trade-in, and you owe $4,000 on it. You now have $4,000 in equity that you can put toward the price of a new vehicle.

This value is excluded from the current car’s agreed amount. You may make a down payment to lower the overall amount on the lease, apart from having the equity added to the new car purchase.

However, you will have to get financing for the remainder of the car’s selling price, either in cash or with an auto loan. The trade-in amount will be included in the deal on your new vehicle. Check that you receive the exact price you bargained for.

How to Trade In a Car With a Loan

Find Out How Much Your Trade-In Car Is Worth

The first step in trading in a financed car is to figure out how much your car is worth and how much you owe on it. Trading in a car with negative equity could prove to be a costly decision in the long run.

Identifying the approximate market price of your vehicle will help you get an idea of what a dealer would bid on your trade-in and give you some bargaining leverage. Certain online sites can help you predict your car’s trade-in value based on things like the year, build, and model of your vehicle, as well as the number of miles on the odometer.

Compare the approximate trade-in value of your vehicle to the loan payout sum to determine whether you have positive or negative equity. It can vary significantly from your loan balance because it includes your loan balance and any interest and fees that you may have incurred.

Compare Trade-In Values Before Making a Deal

To get a trade-in value calculation, get in touch with several dealers. If you believe a dealer is offering you a low quote, you can use the car value figures you found to bargain. Obtaining various quotes will assist you in ensuring that you get the best price possible.

Conclude the Agreement

Close the deal after you have settled on a trade-in value along with the price of the new car. Read the agreement thoroughly and make sure it includes the current loan sum, the loan period, monthly payment, interest rate, and any other verbal commitments made during the bargaining process.

It should also specify how any negative equity would be dealt with. Some dealers will announce that they will pay off your car loan, regardless of the amount you owe, but end up incorporating the negative equity into your new loan.

Alternatives to Auto Trade-Ins?

You do not necessarily have to trade in your financed car. You may still choose to sell it to a private buyer, but you should first notify your lender. Although a private sale can take longer, you may end up getting a larger amount for your vehicle than a dealer trade-in, which could significantly reduce the negative equity, if any.

Try swapping in your new vehicle for a less pricey one if you can not purchase the car you want as you will need to carry over the negative equity. Although you will have to roll back the negative equity from the previous auto loan, your overall loan balance will be reduced, and you will end up paying less in total interest.

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Conclusion

As you can see, you can trade in a financed car easily. However, we recommended taking the time to understand the nitty-gritty details involved to make the right decision.

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Legally, you can trade in your car under loan at any time. The question here isn’t so much about if you should trade in your car after a year or 2, but rather how much money you stand to lose or gain at any point in the loan term.

Equity is the difference between the trade-in value of your vehicle and your remaining loan balance. You have equity in your car – you just need to find out if it’s positive or negative.

The first step is to find out how much your car is worth. Then, subtract the current loan balance and any prepayment penalties associated with your loan. A prepayment penalty is a lender fee you must pay, only if you pay off your loan early. It’s something you would have agreed to in your auto loan agreement. The easiest way to find out if you have a prepayment penalty is to find the electronic agreement and “Ctrl + F” search for the term “prepayment,” or contact your lender to inquire about the situation.

What you do next depends on whether you have positive or negative equity.

When You Have Positive Equity

Your best-case scenario is that you have positive equity in your vehicle. This means you can sell your car for more than you owe on it. In other words, you stand to pay off your loan and still pocket extra cash from a sale. When you trade in your car, the equity from your current vehicle can be used as a down payment for your new car.

When You Have Negative Equity

When you owe more money on your loan than you could sell your car for, that means you have negative equity. Don’t be alarmed – many borrowers find themselves in this situation, especially at the start of a loan term, and it’s not the worst thing. You still have some good options.

  • Pay off the remaining balance out-of-pocket.

    If replacing your vehicle is urgent and necessary, we recommend digging into your savings to settle the finance agreement with your lender. Be sure to call your lender before you head to a dealership, however, to understand how their process works.

  • Wait until your car has positive equity.

    If you financed a new car, you’re likely to be upside down on your loan within the first minute after driving off the lot. New cars depreciate significantly faster than used cars – a 10% decrease in value in the first minute after driving off the lot. It makes more financial sense to trade your car in after 1 year, after you’ve enjoyed it a bit longer. As a general rule, you should trade your car in after 2 years minimum, for a better chance at positive equity.

  • Trade in for a smaller car.

    Sometimes, you don’t have the benefit of time to wait until your car gains more equity. You could trade in your car for a lower payment – get a cheaper, smaller car. We compiled the best cheap cars on the used market, just for you.

If you’re feeling a sense of urgency around this decision, if nothing else, avoid these situations:

  • Don’t roll negative equity into a new loan.

    While it’s possible for you to roll your outstanding loan balance into a new car loan, it isn’t prudent. You’ll essentially be paying more in interest on that amount of money and can increase your chances that your next loan will remain upside down. When you borrow more than what the car is worth, you’re setting yourself up to be in a possibly worse position down the line.

  • Don’t hyper-focus on monthly payments

    . If you decide to trade in a car with negative equity, don’t be fooled by lower monthly payments at the expense of paying more interest over a longer period of time. Be sure to compare the amount of interest you’ll pay over time as you’re comparing loans.

Written by Jane