Getting a car loan doesn't have to be a nightmare, even with bad credit.

Can I trade in a car with a loan balance? Yes, you can. Dealerships do this every day because your former lender still gets their full amount on time.

Trading In A Car With A Loan

Let’s look at what this process involves and whether you should do it or just retain your current financing plan.

How soon can you trade in a financed car?

Let’s look at some favorable situations.

  • 1. When you have positive equity on the car

When a buyer has positive equity, it means that his car exceeds the loan in value. For instance, you bought a car worth $40,000 and received credit financing worth $30,000. What happens when the car depreciates by 20%  and you pay $10,000 after one year?

The car’s new value amounts to $32,000 while the outstanding balance drops to $20,000. So, your car’s value exceeds the credit by $12,000. You won’t have to top up any balance when buying a car from a different dealership.


2. When your credit score improves significantly

Car buyers with subprime credit ratings pay twice to thrice the interest paid by debtors with excellent scores. A buyer with a rating of 720 gets their financing at 3.07% interest while another with a credit score of 620 pays 9.58%

If your credit score was 689 when you got the original loan but you improve to 720, you can apply for a trade in. Why is this a good move? Because the interest rate on auto financing drops by 50%.

3. When you get a better credit lender

Let’s assume you joined a credit union the same time you got your current auto loan. After two years, the union decides to offer you an auto loan at a more affordable interest rate compared to your current lender. This announcement also coincides with your plans of getting a better car. Is trading in a wise decision?

Yes, it is because it saves you money. If the bank financed you at 5% and your credit union is willing to charge you just 2.5%, ditching your bank is the best financial move. Paying high-interest rates only makes credit lenders rich.

Tip: 8 Amazing Credit Habits You Need to Start Now

4. When you can afford to pay the difference on a negative equity car loan

Let’s assume you’ve just landed a nice break in your business. Now, you’re guaranteed of making thrice the profits you previously made thanks to getting new clients. The obvious boost in your financial situation is so huge that can you can get out of a negative equity car loan with just one payment.

Should you go ahead and trade in the car? Yes, you should because you cannot recoup the high interest incurred through a private sale. Trading in enables you to make the best out of a bad situation by bridging the gap between credit and your car’s value.

What are the benefits?

1. Upgrade to a new car

If you’ve just received a major job promotion and want to reward yourself with a new car, you can ditch your used one by doing a trade-in. Used cars might be affordable but one has to spend extra money replacing old or damaged parts.

Trading in enables you to get a better quality car because dealerships allow you to pick new cars. You just have to meet the laid out requirements for the new financing arrangement. Plus, buying a new car has a greater sense of achievement than settling for a used one.

2. Upgrade to the latest vehicle

Trade-ins make upgrading to the latest vehicles easier because you need less cash for down payment. If you’ve just got a new baby and need a larger family van, this purchasing option ensures that your family enjoys the best safety features in private transport.

This method is ideal for motorists loyal to particular brands. If your favorite brand is Mercedes and you own a previous SUV model, you can easily upgrade to the latest edition by doing a trade-in. Doing this gets you value for money because you get a good offer for what’s most likely your dream car.

3. Builds your auto credit history

What is auto credit history? It’s a record that shows your performance with previous and current car loans. In order to increase your credit limit when it comes to auto finance, you need a rich history. In order to buy a luxury model, credit lenders focus on debtors who have at least three fully paid loans in their auto credit history.

Trading in your car is a direct step towards building sufficient credit history. Your current dealership pays your outstanding balance in full. This doesn’t nullify your previous monthly payments.

Tip: Do Blank Check Auto Loans Really Work?

4. Your credit score still improves

What happens when the new lender repays your outstanding balance? Your credit score on the previous loan improves and so does your overall ratings. This purchasing method ensures that your lender receives all due payments within your agreed repayment plan.

Earlier on, we saw that applying for a trade in boosts your auto credit history. In order to get the best interest rates for future car deals, you need an excellent credit score. Doing a trade in enables you to gain this improvement as well as an upgrade to a better car.

Tip: 7 Things Your Car Dealership Won’t Tell You About a Car Loan

Let’s look at the cons

1.  Is the loan canceled with the trade in?

No, it’s not. Your new lender rolls it over to your current repayment plan for the new car. This is manageable when a debtor owes less than $10,000 on their current auto loan. If your debt exceeds this amount, applying for a trade in might be unwise.

Why is this a bad move? Because the car payments get so high that you might experience struggles keeping up every month. Plus, there are comprehensive insurance payments, which tend to get expensive. Buying a car using this option is unsafe because there’s a high risk of making late payments.

2. You have to follow up with your previous lender

Sometimes, buyers who opt for this method end up with damaged credit scores due to hitches in clearance. After your new dealership pays your outstanding balance, they receive the title of the car you want to trade in. On the other hand, they may not follow up with credit reference bureaus.

If the previous creditor didn’t close your credit account, the digital payment system considers you a defaulter. Each skipped payment date appears in credit reference bureaus and lowers your credit score.

3. Only available to buyers with good credit scores

This type of trade in is limited to buyers with good credit ratings. Creditors feel wary dealing with high-risk borrowers and so they feel hesitant repaying outstanding balances on bad credit auto loans.

4. Defaulting has a terrible impact on one’s auto credit history

If a debtor happens to lose their jobs and can’t afford the car, two things might happen. He or she might decide for a voluntary surrender and bear the consequences. Alternatively, one can post an advert and wait for a private buyer. However, this option has slim chances of success due to the outstanding balance involved.

Apart from affecting your credit score, defaulting represents you badly in the eyes of potential auto finance lenders. It makes it hard to obtain financing beyond your previous limit and this confines your choice of cars.


How do you trade in a car with negative equity?

1. Download your credit report before visiting dealerships

Auto finance lenders expect you to present your credit report when applying for a trade in. Make sure you download it a couple of weeks in advance so that you can find out whether your previous lender updated your credit account.

2. Know your outstanding balance

It’s wrong to assume that your lender’s credit statement is accurate. Download your bank statements to confirm whether the deductions in your account appear in the lender’s records. Doing this helps you to know exactly how much you owe so that you can provide correct information in your trade-in application.

3. Compare different trade-in offers

As a rational debtor, your priority is getting credit at the lowest interest rate possible. Take time to evaluate what every lender has to offer by visiting several offices.

4. Know the value of a car

When you approach a dealership for a trade-in, the sales rep will undervalue your car. They do this to sign you up for a high loan principal. It enables them to get larger sales commissions and the dealership makes more interest.

You can rely on Kellys Blue Book to give you an accurate estimation of your car.

Tip: How to Get Cheap Car Insurance for New Drivers Under 25

Should I trade in a car with a loan?

This purchasing method makes sense when you have positive equity and planning to get a better car. It’s also a great way of getting out of an expensive auto loan without damaging your credit score. Boosting your auto credit history enables you to get better cars for your personal or family needs.