Trading-In a Car With Negative Equity: What You Need to Know

Trading in a vehicle under finance can be a bit daunting, but it’s a common process that many Canadians go through when upgrading their cars. This guide will help you understand how trading in a vehicle under finance works, ensuring you make informed decisions at the dealership.

What Does “Under Finance” Mean?

When a vehicle is "under finance," it means there’s an outstanding loan on the car. You haven’t paid off the full amount of the loan you took out to purchase the vehicle.

 

Trading in a vehicle under finance involves dealing with the remaining balance on your current loan while negotiating the trade-in value of your car.

 

Steps to Trade in a Vehicle Under Finance

1. Know Your Loan Balance

The first step is to contact your lender and find out the exact amount you still owe on your vehicle. This amount is often referred to as the loan payoff amount.

 

2. Determine Your Car’s Trade-In Value

Research your vehicle’s trade-in value. Various online tools can provide estimates based on your car’s make, model, year, condition, and mileage. Dealerships also appraise vehicles to give you an official trade-in offer.

 

3. Calculate Equity

Equity is the difference between your car’s trade-in value and the amount you owe on your loan. If your car is worth more than what you owe, you have positive equity. If it’s worth less, you have negative equity.

 

Trading in With Positive Equity

If you have positive equity, the dealership will apply the trade-in value toward the purchase of your new vehicle. For example, if your car is worth $15,000 and you owe $10,000, you have $5,000 in positive equity.

 

This $5,000 can be used as a down payment on your new car, reducing the amount you need to finance.

 

Trading in With Negative Equity

If you have negative equity, it means you owe more than your car’s trade-in value. For instance, if your car is worth $10,000 but you owe $12,000, you have $2,000 in negative equity. You’ll need to decide how to handle this deficit:

 

• Pay the Difference: Pay the $2,000 out of pocket to cover the negative equity.

 

• Roll Over the Negative Equity: The dealership may allow you to roll over the negative equity into your new loan. This means adding the $2,000 to the loan amount for your new car. While convenient, this increases your new loan amount and could lead to higher monthly payments.

 

Steps at the Dealership

1. Visit the Dealership

Bring your current car, loan information, and any other required documents to the dealership. Inform the salesperson that your vehicle is under finance.

 

2. Vehicle Appraisal

The dealership will appraise your vehicle to determine its trade-in value. They may ask for your loan payoff amount to understand your financial situation better.

 

3. Negotiate

Negotiate the trade-in value of your vehicle and the price of the new car separately. Ensure you get the best deal for both.

 

4. Finalize the Deal

Once you agree on the trade-in value and the new car price, the dealership will handle paying off your existing loan. Any equity, positive or negative, will be applied to your new loan.

 

Benefits of Trading in a Vehicle Under Finance

• Convenience: Trading in your car at the dealership is convenient. The dealership handles the loan payoff and other paperwork, making the process smoother.

 

• Potential Savings: Trading in a vehicle under finance can lower the amount you need to finance for your new car, especially if you have positive equity.

 

Tips for a Smooth Trade-In Process

• Research: Know your car’s value and loan payoff amount. This knowledge will help you negotiate effectively.

 

• Check for Incentives: Some dealerships offer trade-in incentives that can boost your car’s trade-in value.

 

• Understand Your Loan Terms: Be aware of any prepayment penalties or fees associated with paying off your loan early.

 

• Compare Offers: Visit multiple dealerships to get the best trade-in value and new car price.

Trading in a vehicle under finance is a manageable process with the right knowledge and preparation. By understanding your loan balance, knowing your car’s trade-in value, and negotiating effectively, you can make a smooth transition to your new vehicle.

 

For Canadians, this process is facilitated by dealerships that handle most of the paperwork, making trading in a vehicle under finance a practical option when upgrading your car.