Can I Trade in a Financed Car for a Cheaper One?

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Contributing Writer

Amy Fortune is a contributing writer for CarsDirect and lead writer/editor for AutoCreditExpress. She also contributes regularly to several other high-traffic blogs. Amy was born in North Carolina and grew up with an appreciation for NASCAR and everything automotive. Now based in the Motor City, she continues to be happily immersed in car culture and automotive finance.


, Contributing Writer - December 2, 2016

It is possible, in many cases, to trade in a financed car for a cheaper one, but it really all depends on your situation.

Consumers trade in cars all the time on which they still owe money. In fact, very few people actually wait until their vehicles are paid off before purchasing their next one. However, how difficult or easy it is to do will depend on the amount of equity you have in the car you want to trade.

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 will make a big difference. As long as your vehicle is worth as much or more than what you owe on the 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 will be 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 a 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 for a cheaper vehicle, you will 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 is 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 ($1,000-$2,000), a lender will probably approve the roll-over. But most lenders will be reluctant to roll a large amount of negative equity into a new loan.

Of course, there are exceptions with every rule. Occasionally, captive lenders (lenders tied to specific automakers) will have a large inventory of a certain vehicle 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.

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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. That's why we've teamed up with the kinds of dealers that can give you a better chance at getting financed. Our simple and secure 1-Step Auto Loan Application only takes a minute to fill out, so go ahead and get started today.

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, Contributing Writer

Amy Fortune is a contributing writer for CarsDirect and lead writer/editor for AutoCreditExpress. She also contributes regularly to several other high-traffic blogs. Amy was born in North Carolina and grew up with an appreciation for NASCAR and everything automotive. Now based in the Motor City, she continues to be happily immersed in car culture and automotive finance.


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