Can I Trade In My Financed Car For A Lease – By: Kelly Guinan By: Kelly Guinan Arrow Right Contributor, Personal Finance Kelly Guinan is a freelance editor and writer with over five years of personal finance experience. She is also a full-time employee at the local library, where she helps her community learn about financial literacy, among other topics. Kelly Guinan
Edited by Pippin Wilbers. Edited by Pippin Wilbers Arrow Right Editor, Auto Loans Pippin Wilbers is an editor specializing in auto loans. Pippin is passionate about complex topics like auto financing and helping borrowers stay relevant in a changing and complex lending environment. Connect with Pippin Wilbers on LinkedIn Connect with Pippin Wilbers by email Pippin Wilbers
Can I Trade In My Financed Car For A Lease
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Should You Take A Lease To Buy A Car? Pros & Cons
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If your car is worth more than what you owe on your loan, it’s not a big deal to trade it in before it’s fully paid off. However, if you have negative equity, meaning you owe more than the car is worth, it’s best to pay off your car before you trade it in. Converting negative equity into new debt means overpaying.
It’s usually best to pay off or pay off your car loan before selling or trading it in. The key question is whether your loan has positive or negative equity. With negative equity, you always want to pay off your car loan before trading in your car.
Positive equity on a car loan means you owe less on the car. So if your debt is $10,000 and your car is worth $15,000, you have $5,000 of positive equity. If you decide to trade in your car, the first $10,000 will pay off your current loan. The remaining $5,000 in equity goes toward a down payment on your next car, reducing the amount you need to borrow.
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If your loan has positive equity, you don’t have to pay off your car loan in full before trading it in if you don’t want to. You will get enough money from the trade to repay the loan.
A negative equation is the opposite. If you still owe $10,000 on the loan, but your car is only worth $8,000, you’ll have $2,000 in negative equity. This is what lenders and financial advisors call “down.”
This is a position you do not want to be in. If you trade in your car with negative equity, you must pay the remaining loan balance out of pocket before trading it in or rolling the negative equity into a new loan. We do not recommend converting negative equity into new debt because of the risk of it reverting to new debt.
A new loan will require you to borrow more money, which means higher monthly payments. Plus, you’ll end up with more debt on the car, which won’t make financial sense in the long run.
Trade In A Car That’s Not Paid Off In 3 Steps
Several other factors complicate this decision. Consider the current cost of car ownership. If it’s old, you could end up spending more money on expensive repairs. Alternatively, if it gets bad gas mileage, it can be expensive to run. In such cases, it may be better to trade in the car before paying, to save on the value of the vehicle.
Also, consider whether your lender will pay a prepayment penalty. Check your loan agreement. Some loans have early or late payment penalties. The prepayment fee averages 2 percent of the outstanding amount, so you have to decide whether to cover the fee or not.
People often trade and sell repossessed vehicles. In fact, dealers may advertise that they will pay for your car when you upgrade to a newer model. But selling a loaned car is more complicated than trading one car for another.
If the loan assignment is reversed, trading is probably not the best course of action. Instead, consider selling your car to a private buyer, paying off the loan, or refinancing at a lower rate.
Servicemembers, Arm Yourself With Basic Car Buying Skills—how To Trade In Your Car
By working with a private buyer instead of a dealer, you can sell your car for a higher price. However, you must repay the lender and transfer ownership yourself. Dealers usually do this on your behalf, so it can be an extra hassle.
Paying off debt is impossible for most people. But if your payments aren’t hurting right now, put a little more money aside. Therefore, the remaining loan balance from the car trade-in cannot be applied to your new car loan.
Finally, try to refinance at a lower rate. Don’t extend your loan term in an attempt to lower your payments – this increases your chances of foreclosure. Instead, reduce the total amount you have to pay.
As long as you don’t pay back the loan, trading in the car for a cheaper option may be the right decision. If you have negative equity, try refinancing instead, which will lower your interest rate and make you pay less overall. The most important thing is not to cancel the rest of the loan. Work with your lender, sell your car, or find an alternative option to avoid taking on more debt.
Trade In Car Or Refinance
Kelly Guinan is a freelance editor and writer with over five years of experience in the personal finance industry. She is also a full-time employee at the local library, where she helps her community learn about financial literacy, among other topics.
Edited by Pippin Wilbers. Edited by Pippin Wilbers Arrow Right Editor, Auto Loans Pippin Wilbers is an editor specializing in auto loans. Pippin is passionate about solving complex topics like car financing and borrower support.
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