Trade in a car with a loan


What Is An Upside Down Car Loan?

You are upside-down on a car loan when you owe more than your vehicle is worth. It happens a lot, but there are ways to limit the long-term damage it will do to your finances.

Industry experts acknowledge that automobiles lose 20% of their value as soon as you drive off the lot, which means the $25,000 car you just bought, is only worth $20,000 by the time you hit the first traffic light outside the dealership.

For the people that need to borrow money to purchase a car, that is the definition of being upside down – sometimes referred to as having “negative equity” – on an automobile loan. They owe more than the car is worth as soon as they sign the contract.

The average price for a new car in 2017 was $35,000 and the average loan was $30,000, meaning consumers are putting down $2,000 less than the 20% suggested for car loans. Using the numbers above, you would need to have a $7,000 down payment on a $35,000 purchase to avoid starting out with negative equity.

Unfortunately, more and more people make less than a 20% down payment and find themselves upside-down as soon as they buy the car. That is a risky position to be in, especially if you run into a financial crisis and can’t afford payments.

If you try to sell the car, the sale price won’t cover your auto loan. If you get into an accident, most people’s insurance will only pay for the value of the car and not the total cost of the loan. That means you won’t have any money left over from the insurance to put down on your next vehicle and you still will owe money on the original loan.

The fact is that increasing numbers of people have car loans that leave them upside-down. In the first quarter of 2017, a record 33% of new car sales were made to people with negative equity who owed an average $5,147 on their loans. The same thing happens at used car lots. Edmunds, an online resource for automotive information, said a record 26% of trade-ins had negative equity averaging $3,854.

“The best financial move for people is to buy a car and drive it well past the point where you have it paid off,” Jessica Caldwell, senior analyst at Edmunds said. “Unfortunately, the trend is that less and less people are doing that now.”

In most cases, people who are upside down on an auto loan were too eager to buy a car in the first place. They don’t understand the consequences of the situation until it overwhelms them. It takes great discipline and the ability to work through creative strategies to get out of car debt.

Using a Car with Negative Equity as Trade-In

Anyone who has a car radio has heard this advertisement: “We’ll pay off your car loan and put you in a new vehicle …”

You can fill in the rest of that ad with the name of just about any car and just about any dealership in the U.S. and the promise will be as empty as your bank account because it promises negative equity.

The ad plays on every station in every market in America and you have to admit it’s enticing enough to make you stop and think about doing it. Someone else bails you out of a bad loan situation and puts you into a new car with no out-of-pocket expense. What’s not to like about that?

Here’s a word of advice from car-buying experts: DON’T EVEN CONSIDER IT!

Trading in a car with negative equity to take on another car loan with even more negative equity is like throwing gas on a fire because it’s the only liquid you had handy. You just increased the chances for a serious financial meltdown and here is an example of why.

Let’s say you owe still owe $10,000 on a car that is only worth $5,000. The dealer will pay off the $5,000 difference, but then roll that amount into the loan on your next car. So, if you needed to borrow $20,000 for the new car, the dealer rolls another $5,000 into the loan to cover the cost of paying off your previous loan and now you’re borrowing $25,000.

Not only will your monthly payments be higher (and remember, not being able to afford the payments was what got you into trouble to start with), but you likely will be paying higher interest on the loan.

And, don’t forget, you’re going to add more negative equity to your situation when you calculate the 20% depreciation in value the new car will lose when you drive it off the lot.

“The idea of austerity, living within your means, doesn’t seem to be as prevalent today as it should be,” Caldwell said.

“Unless there has been a substantial change in your life circumstances – you’ve started a new construction business and now you need a truck; or you just had triplets and now you really need a mini-van – to have a new car loan and negative equity in your trade-in does not put you in a good place financially.”

How to Get Out of an Upside-Down Car Loan

So, what’s the solution when you find yourself upside down on a car loan?

If you already bought the car, the best way out is to keep what you have and continue paying it off until you own it, or until the loan amount is lower than the value of the car. At least by then, you have equity in the vehicle and will not suffer a financial setback if you decide to sell it.

If you haven’t bought a car yet, the best idea is turn your back on the new car lot and walk over to the used car lot. There you can find a car that is one-year old and already lost the 20% depreciation that new cars lug out of the lot. That means you should get it for at least 20% less than what you would have paid new and thus avoided the automatic trip to negative equity status.

Another tactic would be to use savings – money you might have been putting aside for a down payment on a future purchase – to pay off your loan. The downside of that idea is that you no longer have money left for a down payment and not many banks want to make loans to consumers who have no down payment.

One more choice to escape from the negative equity position is to pay extra money each month toward the loan principal or, if you can afford higher monthly payments, find a loan with a shorter payment term. This allows you to pay off the loan quicker and build equity at a faster rate.

Refinancing an Upside-Down Loan

Another option is to refinance the car with a new loan. If interest rates have dropped appreciably since you took out the original loan, the refinancing would allow you to pay off the car faster, or at least get some equity in it. Large bank lenders usually duck when this is proposed, but your community bank or credit union will at least consider the option.

If you are a homeowner, a more realistic way to refinance would be to get a home-equity loan. That could provide substantial savings. In the summer of 2017, the interest rate on home equity loans for up to $30,000 was 5.2%, which may be less than the rates on most car loans.

It may be possible to transfer the balance of your car loan to a credit card with a 0% introductory offer. At the end of the introductory period – 12-18 months on most cards – refinance the remaining balance at a credit union or peer-to-peer lender.

Selling Your Upside Down Vehicle

If you’re intent on getting rid of your car, and it’s in at least “good” condition, sell it privately rather than trading it in at a dealer. Private sales of cars produce significantly higher return than trade-ins.

However, there still could be a difference in what you sell the car for and how much you owe on it, so be ready to make up the difference out of your own pocket.

If you are hopelessly upside down on a vehicle and need relief from that distressing debt, selling the car and taking out a second loan to cover the negative equity could be the best option.

In short, if you owe $15,000 and your car is worth $10,000, you are $5,000 upside down or have $5,000 in negative equity. If you sold the car for what is was worth ($10,000) and took out a loan to cover the balance, you would be making payments on a $5,000 loan, not a $15,000 loan.

However, you also would be without a car. This could be a bigger problem if other transit options – bus, subway, carpool, bicycle, walking – are not readily available to get to work, the grocery store, doctor’s office and other necessary stops.

If you do have easy access to transit and want to sell your upside down auto, the steps are fairly simple. First thing to do is determine your car’s true value. Consult Kelley Blue Book or Edmunds to get an accurate appraisal. Be sure to provide honest information about its condition, mileage and options, all of which affect the resale value.

Next, call the bank that holds your car loan and ask what the payoff balance is. Now, do the math: Payoff Balance – Car’s Worth = Negative Equity. Using the example above, that would be $15,000 minus $10,000 = $5,000 in negative equity.

Now comes the hard part: Finding a place that will lend you $5,000 for an unsecured loan! The truth is that you must be a very good customer or have an excellent credit score (or both) to convince a bank or credit union to loan you money in this situation.

There are other places to find the money – family, friends, credit cards – but at least you’re dealing with a $5,000 loan and not a $15,000 loan and you no longer have the expense of owning a car.

Once you sell the car, consider using public transportation rather than replacing your car with another one. The combination of bicycling and using the local bus system is a cheap, efficient method for going to work and doing local shopping. The money saved on car maintenance, insurance and gas could help you pay off the remaining balance on your car or go into a savings fund for a larger down payment on the next car you buy.

Debt-Relief Options to Consider

If you are too far in debt for these strategies to work and you can no longer pay your monthly bill for the auto loan, consider debt help options. Two of the most commonly utilized options are debt consolidation and debt settlement.

When you consolidate your debts, your car loan will be combined with other debts in one large loan. The new loan typically comes with lower interest rates and better repayment options.

In debt settlement, you — or a settlement firm working on your behalf — will negotiate with your creditors to have your balances reduced to a level you can pay it off.

If your finances are in worse shape, you might consider filing for bankruptcy, a process that can clear all or most of your debts. Find out if this option is right for you by meeting with a credit counselor from a nonprofit credit counseling agency.

How You Get Upside Down On A Car Loan?

People are so enthusiastic about buying a new car that when they arrange financing, they don’t account for the fact that the new car loses 20% of its value immediately after purchase.

Add dealer incentives, smaller down payments and a willingness among lenders to create rollover loans (adding in the negative equity from the previous car to the new car loan) and it’s easy to understand why so many new car owners are under water the minute the minute they get behind the wheel of their new car.

Some other reasons that people overpay on cars and get upside down on their loans:

  • Inadequate research. Many consumers don’t do enough research on costs for similar makes and models. If the sticker price on a car is $30,000 and similar models are selling for $27,500, you already are upside down on your new car.
  • No money down, long loan terms. These popular incentives sound too good to be true…because they are! Cars depreciate 20% almost immediately and lose 50% of their value by the third year. If you don’t put at least 20% down, you’re upside down right away. If you’re still paying for a car that is five or six years old, your payments can’t keep pace with the depreciation.
  • Unnecessary options. People allow themselves to be talked into costly options they don’t need or won’t use like a sunroof, leather upholstery, DVD player, etc. Not only does that create more debt, it is impossible to recoup the cost of those options when you resell the car.
  • Roll over loan. If you owe money on your old car, the dealer will often offer to roll that negative equity amount into the loan for a new car. This means you are paying two loans at once – the balance on the old car, plus whatever money you’re financing on the new car. In most cases, that means the total financed already is more than the car is worth and you’re upside down again.

Tips for Avoiding an Upside-Down Car Loan

It’s best to avoid an upside-down car loan altogether whenever possible. Be diligent with research before you buy a car and understand all the costs of options, financing and taxes so you aren’t already upside down when you drive out the door.

For most people, that means accepting the fact that you can’t afford to purchase a new car. Instead, look for a late-model used car with low mileage. The original owner will have paid the price for depreciation in the first year, so the purchase price should be at least 20% off the original cost.

If you are still tempted to buy new, try using the 20-4-10 rule, which means 20% down payment; no more than 4-year loan; and the monthly car payment plus insurance can’t be more than 10% of your gross income. If you can’t make those numbers work, it’s time to go back to the used-car lot.

The following tips can help you avoid an upside-down auto loan:

  • Choose the shortest repayment plan you can afford. Shorter repayment plans mean lower interest rates and faster payoff. For example, borrowing $25,000 for three years at 6.93 interest (credit score of 675) would result in $2,764 in interest paid. The same deal over four years would cost $3,716 in interest and a five-year loan would be $4,715 in interest. That’s about $1,000 more each year for the same loan. The difference would be magnified even more if your credit score was under 650.
  • Make a down payment of at least 20% of the car’s total cost. This equals the 20% depreciation on the car that happens when you leave the lot.
  • Before you buy, consult Kelley Blue Book and Consumer Reports to estimate the true value of the car. This will keep you from overpaying for the car.
  • Ask about incentives. Dealers may offer enough cash incentives to make up the difference for the 20% depreciation that happens almost immediately when you buy a car.
  • Pay off your car loan before you sell or trade-in. You can’t be upside down on a paid off car.
  • If you know you’ll only keep a car for two or three years, consider leasing instead of buying. A lease means no loan, which means you can’t be upside down.

One of the few times it’s acceptable to have an upside-down car loan is if you plan to keep your car for many years. You may buy a brand-new car and start off with an upside-down loan, but if you plan to pay down the loan in five years and keep the car for 10 years, you’ll own the car long before it’s time to sell.

Over the total time you own your car, you’ll be able to convert your negative equity into positive equity, meaning it’ll be worth more than you owe on it.

How to Trade in a Car With a Loan

If your are ready for a new car, it is possible to trade in your existing car -- even if it still has a loan. The dealership will pay off the car loan when you trade in your car for a new one. The biggest roadblock will be if your current car is worth less as a trade in than the loan balance. This is called being "upside down" in your current car.

Collect information on your current car loan, including the lender's name, your account number and the lender's phone number.

Select the new car you would like to buy at the dealership. While you are test driving the new car, have your current vehicle appraised for trade-in value.

Give the salesman the loan information on your car so he can include the payoff amount when the price and payment is prepared for dealer's offer to you on the new car.

Negotiate your car deal from the dealer's offer. Try to negotiate a lower price for the car you are buying, a better value for your trade-in and the best possible interest rate. The dealership will have room to negotiate in all of these areas, so keep asking for a better deal until they stop giving.

Verify that the figures on the final agreed-upon details are correct. The new car loan amount should be the new car price, plus taxes and fees, minus the trade-in value, minus your cash down payment, plus the balance of your current car loan.

How to Trade in Your Car When You Owe Money on It

Many people trade their old ride in at the dealership on the same day they buy a new car. It’s convenient and helps lower the purchase price. But what if you want to trade in a car — and you owe money on it? You still can, and the dealership will handle the process in-house.

Trading in a car you haven’t paid off is similar to trading in a car you own outright, but there are some special considerations — especially if you owe more than the trade-in price. Keep track of your car’s current value and loan balance to stay in control of the transaction.

As with the usual trade-in process, you’ll need to bring your vehicle, driver’s license, registration information and all your vehicle keys and remotes to the dealership. You’ll also want to bring your current insurance card to prove you have adequate coverage for your new ride. Be aware that your rates may change when you swap vehicles, and you’ll need to call your insurance agent to transfer and extend your coverage as needed. Rules vary by state, but your dealer can likely do this with you during your visit.

You won’t have the title, your lender will. So you’ll need to bring your loan information.

One thing you probably won’t have is the car’s title, which establishes legal ownership — it still belongs to your lender. You’ll need to bring in your loan information, including your account number and your remaining balance. The dealership will contact your lender to assume the loan and take possession of the title and car. It will also handle any other state-specific paperwork necessary to transfer the title.

You don’t have to pay off your loan and receive the title before trading in your car. However, if you owe more than the trade-in value, you’ll still need to cover the difference. Make sure you understand how much you owe and whether you have positive or negative equity before you head to the dealership.

Payoff amount and trade-in price

If you’re thinking of trading in your car, contact your auto loan lender and request your payoff amount. This might differ slightly from your remaining loan balance because of the time it takes for the lender to receive the money. For the most accurate number, ask for the payoff amount as close to your planned trade-in as possible.

Then compare the payoff amount to your car’s current value. Check online pricing guides such as Kelley Blue Book and Edmunds and look for the trade-in price of the car, since this is the most the dealer will offer.

If your car is worth less than what you still owe, you have negative equity.

Positive equity: If your car is currently worth more than the remaining balance of your loan, you’re in good shape. This difference is positive equity that you can apply toward the purchase of a new car.

Negative equity: If your car is worth less than your remaining balance, you’re “upside down” on your car loan and you have negative equity. You’ll have to pay the difference between your balance and the trade-in value at the dealership.

If you owe less on the car than it’s worth

Say you owe $5,000 on your car, and it’s worth $7,000 as a trade-in. You can apply the extra $2,000 directly to the purchase of your next car. The credit is deducted from the negotiated price, and you’ll need to provide financing — with cash or an auto loan — for any remaining amount. In most cases, credit for the trade-in is included in the contract for your new car.

The extra money can be applied directly to the car purchase of your next car.

The best way to ensure that you get a good price for your trade-in and on your new car is to negotiate each one separately, and check the prices against online guides.

If you aren’t buying a new car and you’d like a cash payout, you can simply sell the dealership your vehicle. The dealership may write you a check the same day or send you one in the mail. If there will be a delay, get the exact amount in writing so you’ll be sure to receive full payment.

If you owe more on the car than it’s worth

If possible, it’s best to drive through the loan, making payments until you’re back to having positive equity in the car or own it outright. But if you’re drowning in payments, trading in your vehicle can provide relief. In such cases, you’ll need to pay the dealer for your trade-in, not the other way around.

You can make a cash payment to the dealer for the negative equity amount, not the whole loan. Say you owe $10,000 on a car with a trade-in value of $9,000. Instead of being on the hook for the whole $10,000, you can pay only the $1,000 difference when you trade the car in.

Rolling over your debt to the your next loan means that you’ll pay more for your new car.

The dealer will often suggest rolling this negative equity into the loan for your next car. Though convenient, this is a risky move — you’ll pay more for your new car and may soon be upside down again.

However, if you can no longer afford your payments — or the difference between your trade-in value and loan balance — and you can’t go without a car, it might be worth the risk. Your payments may become more manageable even if you roll the remaining debt into the new car loan, as long as it’s for a much less expensive vehicle.

Avoid extending your loan term for more than 60 months for a new car or 36 months for a used one. Also know that you’d likely get a better price selling your car privately than trading it in. But then you’d also have to coordinate with the buyer and your lender to ensure the loan is paid off.

Once you’ve traded in your car, check that your loan is paid off seven to 10 days later. The lender should also send a formal document in the mail, which you should be sure to keep.

How to Trade In a Car – Pros & Cons, How It Works

Are you looking to get rid of your current vehicle? You’ve got several options: You could put a “for sale” sign in the window of the vehicle and hope an interested passerby spots it. You could list the car in the automotive classifieds or on Craigslist and field calls and emails from potential buyers who will likely haggle over price. Or, you can simply trade in your auto to a dealer and purchase a new one.

Trade-ins are fairly common – the process is fast and maybe the easiest way to get rid of your used car. However, some people avoid trade-ins entirely, preferring to weed out potential buyers themselves than bargain with a dealer. However, private party sales aren’t as simple as they might seem. Before dismissing the idea of a trade-in, learn what you may gain from going that route, and reconsider the potential risks.

Advantages of Trading In a Car

When deciding the best way to get rid of a car, there are several factors to consider. Before attempting to sell the car yourself, understand how a trade-in can help.

1. You Only Deal With the Dealer

If you trade in your car, the dealer handles the entire transaction from start to finish. All you need to do is show up, negotiate the deal, and you’re one step closer to buying a new car. While there are definitely benefits to selling a car yourself, trading in a car is the better option if you simply don’t have the time or desire to market your vehicle.

Private party sales take time and effort: There’s the task of advertising the car, meeting with potential buyers, and transferring ownership. It can take several weeks or even months to find a buyer. On the other hand, when you trade in your car, you can get rid of your old car in a day or two.

3. It Reduces the Price of Your New Car

If you own your car outright, the dealership will apply your trade-in amount to your new vehicle. For example, if you purchase a car for $25,000 and the dealership gives you $6,000 for your trade-in, you only need a loan for $19,000. And because the dealer knocked several thousand dollars off the final price of your automobile, you pay less in sales tax.

Disadvantages of Trading In a Car

Trading in a car isn’t always the best option. Consider the negatives before making your decision.

1. You May Get Less Money for Your Car

There’s no doubt that trading in a car to purchase a new one is simple and convenient. But too often, the amount offered by dealerships is much less than the private party value.

For example, the private party value of a 2009 Toyota Camry XLE in excellent condition with 30,000 miles is approximately $19,479. However, the trade-in value for the same car in the same condition is only $17,426 – a difference of about $2,000.

2. You Limit Where You Can Buy a Car

When a dealership appraises your car and agrees to buy your car, you’re obligated to buy your next car from that dealership. If the dealership doesn’t have a car that you want, you can’t trade in the car. There is no provision that allows you to trade in a vehicle at one dealership and purchase from another, nor at a later time.

If you decide that trading in your car is your best option, it is important to learn how to get the most money out of the transaction.

Dealers always want to pay the least amount possible. For this reason, some attempt to low-ball the consumer with a price that’s below the net value of the trade-in.

If you don’t know what your car is worth, you’re likely to accept any offer. Therefore, do your own research before stepping foot on the dealer’s lot. Go to Kelley Blue Book online and enter the make, model, year, mileage, and condition of your car to learn the trade-in value. Print a copy of this information and bring it to the dealership.

Any cosmetic damage to your car can lower its net value and cause a low trade-in value. You don’t have to give your car an entirely new paint job, but it doesn’t hurt to clean up the interior or exterior a bit before speaking with a dealership. Shampoo the carpets, drive the car through a car wash, purchase touch-up paint to conceal minor scratches, and repair dents. Simple repairs can add significant value to your car and increase the trade-in offer.

Shopping around does more than get you the best interest rate on your auto loan or the lowest price on your new car – it also helps you get the most for your trade-in. Visit multiple dealerships and request an estimate to learn the value of your trade-in. Keep copies of your quotes and use this information as a bargaining chip.

Depending on the dealership, you might get more money for your trade-in if you buy a more expensive car, rather than a cheaper model. Also, consider shopping for a new car toward the end of the year. This is when dealerships receive the new year’s inventory, and they’re usually eager to unload the previous year’s models. If you’re buying a model from the previous year, dealers are likely to offer more for your trade-in to encourage a sale.

Ultimately, dealerships want your business, and they need to sell cars. For this reason, they’re generally ready to accept your trade-in and negotiate a fair price. Of course, some dealers will try to undercut you – so do your research and familiarize yourself with the process, and you’re sure to get the most money possible for you car.

Do you believe that the pros of trading in a car outweigh the cons? What other trade-in tips can you suggest?

Good reasons not to trade a car you still owe money on

What if the car dealer fails to pay off the existing loan on your trade-in vehicle?

Ever since our inception in the late 1990's we have been warning consumers about the dangers of trading in your existing used car when you head out to buy a new car. Unfortunately most car shoppers make very foolish and painful mistakes, among them trading in their existing car when buying a new car, but even worse, trading in a car that they still owe money on.

What is supposed to happen when you trade in a car with an existing loan balance?

Let me reiterate again, that our official position here at is that you should never trade in a car you owe money on, so what is supposed to happen is you are not supposed to trade in a car with an existing loan balance, it was a trick question. That being said, in an ideal world your car salesperson should determine from the lender you obtained your car loan through what the current 10-day payoff amount is so that they can pay off your loan and close it out.

Also keep in mind that most car buyers are upside down on their loan, meaning they owe more to the bank than the trade-in value that the car dealer is giving you. In this case, you are responsible for that gap in value, and this amount usually gets added onto your new car loan. Car dealers don't go out of their way to inform you of this, because most people would have second thoughts about a car payment that represents 2 cars, when they thought they are only buying one car.

Most car shoppers erroneously think that when they trade in a car, it is gone forever, along with all the payments and obligations. Any amount you still owe on the previous car is always padded into the payments of the next car. which often starts you off upside down on your new car loan right out of the gate. You need to avoid this situation at all costs.

Your dealer should act fast to pay off your trade-in within 10 days

Normally when you call any lender for your payoff amount, the payoff figure they give you is good for 10 days, otherwise interest starts to accrue and they have to recalculate the amount and give you a new payoff figure which would be good for 10 days from your newer request date.

This is the most crucial part of this entire transaction. The car dealer must pay off your trade-in vehicle within 10 days and they must pay it off before your next monthly car loan payment due date. If they fail to do this, then in the lender's eyes, you are now late with your payment, and you will get slapped with a late monthly payment fee, they don't care you sold your car, you still have an unpaid loan.

It gets real ugly when the dealer fails to pay off your car loan on your trade-in

We have heard over the years from car buyers who traded in their car with an outstanding loan balance to buy a new car, and the dealer was supposed to pay off the car loan but did not. What happens next is the buyer is living a blissful life with their new car thinking the old car is out of their life forever, when out of the blue they start getting menacing letters and phone calls from the lender who is holding the note on their previous car.

The lender is complaining that these car buyers are now a month late and they have to pay penalties and late fees. This ends up slapping many people upside the face, taking them completely by surprise, because, as they all tell me, "I no longer own that car, the dealer does! I sold it to them over a month ago."

The dealer did not pay off your old car loan, now the lender is coming after you

Unknown to you, while you were enjoying your new car, the interest was still accruing on your old car loan because the dealer had not paid off the loan like you thought. This is where everyone makes the mistake of thinking that they signed paperwork so it must be a done deal. They could not be more wrong, and the meter is still running.

Just because you trade in a car for a new one doesn't mean it's a done deal

The big error in thinking among car buyers is that they think that just because they traded in their old car and no longer own the car, that there is no more responsibility to that car. The problem is like the old saying goes, no job is finished until the paperwork is done.

In this case, while you might no longer own the car, you do indeed still owe that loan until it is paid off in full. You can argue all you want with the bank that you sold your car to the car dealer. The bank could care less, because they have a contract for the loan to be paid back by you, that is written between the bank and you, no the car dealer.

Typically the car dealer does not take your place as the borrower; they usually take your place as the owner of the car. Since they don't want to take your place as the borrower, and if they are legit, they payoff the loan on your trade-in which should be less than your trade-in value. But again, the bank only recognizes you as their customer, as the person responsible for paying back the loan until it is paid off 100% and the lien is satisfied.

As far as the lender is concerned, the contract is between the bank and you, not between the bank and the car dealer. We've heard from people over the years who had their credit ruined over this because the lender will place a black mark on your credit report for being 30, 60, or 90 days late, on top of all the late fees and interest they will hit you up for.

It's up to you to make sure the loan got paid off by the dealer days after the deal is completed. You need to keep calling your lender to confirm when and if the loan was paid off and be certain no other amounts are owed.

Now you know why you should not trade in a car that you owe money on

This scenario described here happens more often than you think, and we have heard complaints about this over the years from many car buyers. This is why we have been warning you for many years never to trade in your car if you owe money on it, because the risk is too high that the car dealer will not pay off your loan, and you will be stuck paying extra interest, you can have your credit report trashed, and you will suffer emotionally.

Is this legal? What can be done to force the dealer to pay?

There is not much you can do here, because there are no laws forcing the dealer to pay your car loan off. There was nothing in writing on the dealer's paperwork stating they would pay off your car loan, and you failed to force them to give you anything in writing.

If the car dealer fails to payoff your loan, file complaints against them

All you can do is file an online complaint with the Better Business Bureau at, or your state's attorney general web site, and also leave a public review of this car dealer's dirty deeds on the Ripoff Report web site. This way anyone doing a search on the car dealer will see your BBB and Ripoff Report complaints. The Better Business Bureau, and Attorney General's office are entities which managers of that car dealership have to listen to, even if the salesperson or finance person are ignoring your phone calls. If they don't answer Better Business Bureau complaints, their grade drops.

How to make sure the dealer will pay off your current car loan

You need a preemptive strike here, you need to force the dealer to put into writing exactly how much they are giving you for your trade, and that that they will pay off your car loan in full in 10 days or they will have to pay 100% of all expenses arising out of failing to do so. If the dealer refuses to give you anything in writing, then leave, or your life will surely be pure agony in the very near future.

It’s too bad that we don't have any laws on the books forcing dealers into a common form of disclosure that itemizes the trade in amount, and what is owed on the trade in, and who is paying what for the loan payoff if there is one. You might also go to where the signatures are located on your paperwork, and have the dealer write in "Dealer agrees to pay off trade-in car loan in full within 10 days."

Any car dealership refusing to honor this minor request of yours by adding that one tiny little phrase to the paperwork is unethical because they don't want to protect your rights, while giving them carte blanche to commit an array of scams against you, and thus you should leave immediately, this is a deal killer, and the deal is over at this point.

If the dealer tells you not to worry, it's already written into the fine print that they will pay off your car loan, have them show you the exact sentence, otherwise they are lying. If they are smart enough to tell you it's already in the contract, then they are smart enough to show you where it is.

This is where you need to be very alert during your transaction, because you want the dealer to itemize on your paperwork exactly how much they are giving you for your trade-in so there is never any confusion over what you are getting. These 2 photos below show examples of actual new car paperwork that reveal where the dealer indicated how much they are giving the buyer for their traded in vehicle. This is where the rubber hits the road because if they promise to give you $8670 for your trade-in, then it better be itemized there on the paperwork at that amount with no games.

Example sales contract shows dealer is paying $8670 for the buyer's trade-in vehicle

Another contract reflects dealer is paying $9,000 for the buyer's trade-in vehicle

What should you do with a trade-in that you still owe money on?

If you still owe money on the car loan for your existing used car, we recommend you try to pay off the loan yourself, this way you get the title in a week, you no longer have to worry about who's going to pay off the loan and now you have a car that is easier to sell to more potential buyers, both private buyers and car dealers, because many used car buyers won't buy a vehicle from you if it has a loan balance, or unless you have the title.

This is a much better financial and logistical position for you to be in than taking a chance and hoping the dealer pays off your auto loan in time, because now you no longer have to trade in your car; you can just sell it privately first, and use the higher amount of proceeds you will receive as a down payment for your new car.

Another benefit you get by paying off your existing car loan first is you are bypassing the car dealer trying to low ball your trade-in. Remember you can potentially make $3,000 to $6,000 more selling your used car privately, because dealers have to offer you way less than Kelly Blue Book used car market value for your car, so that they can recondition it and offer it for sale at a profit.

What If you are upside down on your car loan and can't pay it off?

If you are upside down on your current car loan, and believe me, many of our site visitors tell us they are under water by thousands of dollars, you don't have enough money to pay off your current car loan, what then should you do? You're not going to like my advice here on this scenario.

The problem is you got yourself in deep and created a worst case financial scenario, a massive wake of damage, so our best advice for you is to ride out the storm, and keep the car you are upside down on and try to get back ahead of the curve by sending in extra principle payments whenever you can until you get right side up on the loan again.

The problem with most car buyers is foolish lack of planning, and many people make the mistake of putting no money down when we recommend 20% down, and violating our 48 month maximum loan guideline, and going with 84 months instead. All this leads up to paying much more money over time in interest, as well as becoming upside down on your car loan the minute you drive off the lot.

Avoid this used car loan balance trade-in scenario altogether by getting a shorter car loan like 48 months. This way if you decide to trade in your current vehicle in 5 years, your car loan will be paid off already. It really is that simple, you have to be smart and try to think ahead 5 years to see what obstacles to avoid.

Warn all your friends about this, and don't let this scenario happen to you.

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