Trading In a Car When You Owe More than It's Worth

Trading in a car typically means you will earn back some cash to be put toward the down payment of a new vehicle. However, if you are upside down on your car loan, you will owe money at trade in. The value of your car is lower than the sum remaining on your loan. This can happen in one of two scenarios: you failed to pay off the loan quickly enough or the car depreciated in value very rapidly. In either case, you will need to resolve the remaining debt with the lender.

Recourse Loan Requirements

Most car loans are recourse loans. In a recourse loan, you are liable to pay the lender the remaining sum on a debt if an asset is repossessed and does not cover the entire principal. You may elect a nonrecourse loan, but it will likely be more expensive. In the case of a trade in, even a nonrecourse loan may not protect you from repaying the sum you owe outstanding of the value of the vehicle. The car is not being repossessed; you are voluntarily terminating the loan early by trading in the collateral on the loan.

Valuing a Trade In

The first thing you should do if you feel you are upside down on your car loan is make sure you are receiving a fair valuation of your vehicle's worth. Dealers and lenders will often quote very different prices from one another. Many borrowers lack the knowledge to know what a fair price is. You do have resources to assist you. For example, you can use the National Auto Dealer's Association price or the Kelly Blue Book price. This will give you an idea of what a car of your make and model is worth today. From there, you can estimate a fair trade in price for your car. Seek multiple quotes if you feel your car is being under valued.

Rolling Over a Loan

One option you may have to resolve your loan debt is to roll it over into a new loan. For example, you may have a dealership loan on your car that has a sum of $3,000 remaining. You are going back to the same dealership for a new car, but your trade in is only valued at $2,000. The dealer may agree to extend you a loan with no down payment for a sum $1,000 greater than the sticker price of the new car. You will need excellent credit to receive this type of option.

Paying the Remainder

Another option available to you is to simply repay the remaining sum you owe on the loan after trade in. You will need to have the excess cash to make this work. Remember: most new car loans will require a down payment. If you hand all of your cash over to the previous lender, then you may come up short on securing a new auto loan. If you plan on using the same lender again for a new loan, use the promise of new business to negotiate a good pay off quote.