What You Need to Know About Trading in a Car With a Loan
Let us start with saying that nobody likes this moment in the buying process. It seems confusing and complicated. But everything becomes clear when you know how to approach the situation.
First of all, there is a nasty piece of information which I should share with you. Your car costs you more than you think and the dealer will try to offer you less money than you expect. The gap between your car value and your debt is known as negative equity. This tiny creature will crawl in the loan for a new car like a stray cat you once saved.
The trade-in of your car is provided to you as a courtesy service, however, the dealer buys your car at the wholesale rate which means that you get sixty to seventy percent of the value of your car you can find on Kelley Blue Book. Plus, your lender says “Goodbye” as you leave his lot because he wants to be paid off.
Thus, you should be ready to the following calculations. If your car is worth twelve thousand dollars according to the dealer and you still owe fifteen thousand, the dealer pays off your lender with the twelve thousand and adds the other three thousand to your new loan. Congratulations! Now you pay thirty thousand dollars for a twenty-seven thousand dollar car. It may seem rough, but ignoring it will hurt more.
There is something else first-time buyers forget all the time. The negative equity on your trade-in gives the pre-approval of your mortgage a hard time because lenders check debt-to-income ratios and your extra car debt reduces your chances to qualify for the home you wanted to purchase. The extra monthly payments of your car might simply disqualify you from mortgage pre-approval.
The smart way to proceed will be decreasing the loan balance of your old car to its trade-in value before visiting the dealership. It will require several extra payments from your side or selling the car yourself via websites such as AutoTrader or Facebook Marketplace. Yes, it will mean meeting strangers who will test drive your car, but saving two to three thousand dollars is worth all of the awkward conversations.
But if you still want to visit the dealership and trade in your car, you should know your numbers inside and out. Get the payoff quote of your car in the morning from your lender and compare it to the information you find on Edmunds, KBB, and CarGurus. Then, separate the trade-in negotiation from the negotiations about the new car deal because dealers will try very hard to mix them up.