June 7, 2016

How to Trade in a Vehicle that Isn't Paid Off

“More dealerships are happy to work with trade ins these days, making more Canadians eligible to trade in a car that isn’t entirely paid off. A trade is evaluated like this...”

It isn’t difficult to become fed up with your vehicle. Whether your car isn’t meeting your lifestyle needs, or is in constant need of repairs and maintenance, there are plenty of circumstances that frame the option of a trade in as appealing. But what if you are still working to pay the vehicle off?

The good news is that most dealerships are happy to work with trade ins, even in the instance that a car isn’t entirely paid off. A trade is evaluated like this: A dealer takes into account your vehicle’s entire equity, and uses the total balance to determine the trade in value. In the case that you’ve successfully paid off your vehicle, the dealer will consider the car’s value as equity, and apply the amount towards your new car’s purchase. For example, if your vehicle is worth $12,000 and you owe $8,000 on it, you will have $4,000 in equity to direct towards your new vehicle’s payment.

In contrast, if you owe more on your vehicle than your car’s valuation, then a dealer considers this ‘negative equity’, where you cannot pay off the balance of your loan even if you are offered the full value of the vehicle. Thus, if you owe $12,000 on your trade in and the vehicle is only worth $8,000, you would have $4,000 negative equity. In this instance, many dealers will still allow you to trade in a vehicle, although it is likely that you will have to increase the amount that you are financing.

If you are looking to trade in your vehicle for an upgrade or to try and get a lower rate on your financing, you should start by researching the value of your vehicle using online resources and publications. This will allow you to determine your approximate equity before you approach the dealer, while maintaining a realistic idea of your vehicle’s value.

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