When you are in debt, how to trade in the old for the new
Changing for a car you haven't yet bought requires some extra steps - including knowing all the numbers in the best car deals.
Yes, you can exchange the loan for a car. But be careful to make sure you - not the dealer - control the deal.
If you buy a car that owes you money, you will face one of the following two situations:
The owner's equity is positive. If your car is worth more than the loan you owe, you are in good shape. This difference is called a positive asset. It's like you have money to apply for a new car.
Owner's equity is negative. If the value of your car is less than the money you owe, you have a car in negative equity, also known as "upside down" or "underwater" your car loan. When you trade in negative equity, you have to pay the difference between the loan balance and the discount. You can use cash, another loan, or - this is not recommended - transfer the money you owe to a new car loan.
We will show you how to deal with each case. But first, the background.
How does the best car deals work
When you sell a car to a dealer, its value is subtracted from the price of the new car.
When you swap the loan for a car, the car dealer takes over the loan and pays it off. Dealers should also deal with relevant paperwork, such as the transfer of vehicle ownership, which will establish the legal ownership of the vehicle.
If you want to change a car that has not been paid off, you can take the following items to the dealer:
Loan information, including payment amount and account number.
Your car keys and remote control.
Proof of insurance.
Print out your discount value.
It's important to remember that both the price of a new car and the value of a discounted car are negotiable. In order to get a comprehensive best car deals, you need to get a good interest rate for your new loan and a fair price for the discount and new car. Before you go to a car dealership, use the car loan calculator to estimate these numbers and see how much new car payments you will make each month.
Payment amount and discount price
If you plan to discount a car you owe, first contact your car loan lender and ask you to pay the amount (which may be slightly higher than your balance).
The price of your car. Check the current discount value of your car in the pricing guide.
You can use online pricing guides like Kelley Blue Book and Edmunds.
Comparison value. Subtract the payment from the current discounted value of your car.
Although the final discount price can be negotiated, you will now have a feeling about whether your current car is positive or negative.
Exchange positive assets for a car
Suppose you owe your car $5000 and it's worth $7000 as a discount. Now that you have a $2000 interest, you can apply directly for your next car.
This interest is deducted from the negotiated price of the new car. In addition to any equity that applies to the purchase of a new car, you can also make a down payment to reduce the total balance of the loan.
But you need to fund the remaining price of the car - cash or a car loan. The trade in value will be listed in your new car contract. Make sure you get the full amount you negotiated.
Exchange negative equity for a car
If your car loan is upside down, you'd better postpone your new car purchase and replacement until you pay off the loan - or at least until you have positive assets. But if you're worried about buying a car, trade your car for a cheaper one, or even a cheap second-hand one, so you can lighten the burden. In this case, you need to give the dealer your discount, plus the amount of negative equity.
Suppose you owe $10000 for a car, and the discount on that car is $9000. Instead of being burdened with all $10000, the trade in credit will cover most of the loans, and you will pay the dealer a $1000 spread.
Note: dealers are usually happy to suggest that you include negative equity in the loan for your next car. Although it's convenient, it's unwise because it will immediately make you upside down in the new loan. It also means that you create a bigger loan amount and pay more interest.
However, if you need a car, but you don't have the money to repay the negative equity, and you can't pay for the current car loan, then the risk may be worth it. This can happen if your new loan - from an independent lender or dealer - has a lower interest rate. If you decide to buy a cheaper car, your payments may become easier to manage, even if you roll the remaining debt into a new car loan.