Trading in a Car on which You Still Owe Money


If you're tired of your current car and want to get rid of it, you may be able to trade it in even if you're still paying for it. Trading in a car that isn't paid off is fairly common. In fact, people do it every day.

Of course, whether or not you'll be able to do this will depend on your credit situation and the amount of equity you have in your vehicle.

Trading in a Car with Poor Credit and Equity

trading  in  a  car,  trade-in,  poor  credit
If your credit is good and you have equity in your car, everything should go smoothly with your transaction. The dealer will contact the lender and find out the amount of the loan buyout for your current vehicle. They will then pay off the loan and apply the equity (the trade-in value of the car minus the loan balance) toward the purchase of the vehicle you're buying.

If you have equity in the car you're trading, this means that you owe less on the loan than what the car is currently worth. And this is important if you're trying to finance a vehicle with less than perfect credit. In spite of your damaged credit, there are lenders out there that will be willing to work with you, even if you owe money on your trade-in. As long as you have equity in this trade-in, the loan balance can be covered.

But if you have poor credit and negative equity, trading in car toward another vehicle won't be as easy.

Trading in a Car with Poor Credit and Negative Equity

Having negative equity means that your car is worth less than what you owe on your loan balance. And even though it's possible to trade a vehicle in under these conditions, it is not an ideal situation.

This is because, unless you are able to pay the difference out of pocket, the dealer will have to take this negative equity and roll it into your new loan. This means that the amount you'll be financing will be greater than the selling price of the car you're buying. So, unless you have good credit, it's unlikely that a lender will allow you to do this.

Even if your credit is good, adding an old loan balance to a new loan isn't a great idea. If you do this, it's likely that you'll end up accruing negative equity in this other vehicle pretty quickly.

As a buyer with imperfect credit, lenders may see you as a loan risk. This is why, if a special finance lender is willing to finance you, they don't want the amount of the loan to exceed the selling price of the vehicle. So, consumers with poor credit will have a difficult time trading in a car with negative equity.

Even if you were allowed to do this, it would be a bad move for two reasons:

  • The higher interest rate that comes with poor credit will be applied to the rolled over balance as well as the new loan amount. So, the loan could end up being very expensive.
  • Negative equity would probably accrue very quickly with the new loan, making your situation worse than before.
  • With this in mind, it would be best to pay down your loan balance before attempting to finance a different car.

    Auto Financing Assistance for Car Buyers with Lower Credit Scores

    If your credit is damaged for any reason and you need to finance a car, Canada Auto Loan can help. We can save you time and frustration by getting you to the right dealership right from the start.

    Only certain car dealers have connections to the kinds of lenders that are capable of working with unique credit situations. And, luckily, we have a network of these dealers that spans the entire country. For no cost, we'll match you with a dealer in our network that's located right in your area.

    Contacting us also places you under no obligation to buy anything, so you have nothing to lose. So, go ahead and fill out our simple and secure auto loan request to get started today.