Yes, it's possible to trade in a financed car for a cheaper one, but it really all depends on your situation. Consumers trade in cars that they still owe money on all the time. In fact, very few people actually wait until their vehicles are paid off before purchasing their next one. However, how difficult or easy this is to do depends on the amount of equity you have in the car you want to trade-in.
Trading In a Financed Car With Equity
If you find that your car payments are unaffordable and you want to purchase a cheaper vehicle, having equity in your car makes a big difference. As long as your vehicle is worth as much or more than what you owe on its loan, you should be in good shape.
For example, let's say that you want to trade in a vehicle that has a current value of $30,000, and your loan balance is $25,000. In this case, it's easy for a dealer to take the vehicle as a trade-in. They can simply pay off the loan and apply the $5,000 of equity to the purchase of the cheaper car.
Trading In a Financed Car With Negative Equity
Having negative equity – or being upside down – in a vehicle means that your loan balance exceeds the current value of your car. A lot of vehicle owners have negative equity, but they may not realize that this is a problem until they try to trade the car in for a different one.
The difference between your vehicle's current trade-in value and the amount owed on the loan won't simply go away. If you have negative equity in a financed car that you want to trade-in for a cheaper vehicle, you need to do one of two things.
Your first option is to pay the difference out of pocket. Or, you can ask the dealer if this amount can be rolled over into the new loan. Rolling over loan balances is a practice that's fairly common among car buyers, but it isn't really advised. When this is done, the buyer is immediately even more upside down in the new car, and it can create a vicious negative equity cycle that becomes increasingly difficult to escape.
Besides, it may not even be possible to roll the negative equity into a new loan. It depends on how much negative equity there is and whether or not the lender in question is willing to finance this additional cost.
Generally speaking, if the amount of negative equity is minimal (say around $1,000 to $2,000), a lender will probably approve the rollover. But most lenders are reluctant to roll a large amount of negative equity into a new loan.
Of course, there are exceptions to every rule. Occasionally, captive lenders (lenders tied to specific automakers) have a large inventory of a certain model that they want to sell through. When this happens, they may allow buyers to roll more negative equity into loans on this particular model.
Easier Car Loans for Unique Circumstances
At CarsDirect, we understand that not everyone who needs to buy a car is going to be coming from an ideal situation. Whether you have bad credit, negative equity, or anything else that might cause an issue with auto loan approval, we can help.
We believe that everyone deserves a fair chance at having a good car buying experience. This is why we've teamed up with the kinds of dealers that can give you a better chance at getting financed. Our simple and secure auto loan request form only takes a few minutes to fill out, so go ahead and get started today.