Want to know if it’s possible to trade in your car when it carries outstanding finance?

This guide has all the important bits that you need to know.

Trading a Car with Outstanding Finance

Trading your car in when it carries outstanding finance is a common practice. That doesn’t mean you shouldn’t research it first. There’s a lot to consider when trading in financed cars. The most obvious of which is the need to compare car finance deals. Once you understand the way it works you’ll be able to decide if trading is the right thing for you.

In this guide:

The Basics

There is sometimes a misconception about trading in as people believe it wipes out the finance. However, this is only true if the remaining balance is less than the car’s trade-in value. If the car is worth less then it is your responsibility to pay off the remaining finance. Most dealerships will add the remaining finance onto your new car loan. This is often referred to as ‘rolling over’ and it saves you the confusion of having two car loans.

Simply put, when the amount you owe on your car is less than its trade-in value, your trader will deduct the outstanding finance from the sale value of the car and give you the remainder. They then use this money to release the lien. The lien is the dealerships right to keep the car if repayments are missed. Finally, you turn over ownership of your car to the dealer and you can get a new car.

Why trading in your car is a good idea

There are three good reasons for trading in your car before you’ve paid off the finance. Cost efficiency, dealership incentives and if you’ve researched the car you want.

Excluding the loan that you are paying off, if you find that you are having to pay more than you expected for the upkeep of your car then trading in is a good move. Getting a newer model that will need fewer repairs is always a good move. Maybe consider something that is more fuel efficient so you’re not wasting money on petrol. Smaller cars are better because they cost less to run. If you need a bigger vehicle though try to find one that has fewer comfort features.

When it is time for dealerships to get new cars in there is an influx of incentivising offers geared towards trade-ins. This is the time you’ll find great deals on the cars still in the showroom as dealers want to make as much space as possible for new cars. Dealers also like to keep customers loyal to their dealership, so there is always room for bargaining when it’s time for you to trade in.

Researching is a must. If you go into a dealership having researched the car you want then striking a deal is always going to be easier for you. It also means you’ll know beforehand if you can afford the repayments on your new car.

If you're unsure of where to start your research, comparison sites like Money Expert are essential. We allow you to compare car finance deals without affecting your credit score. We also keep everything tidy and in one place, meaning you’re not flicking back and forth between websites getting confused.

Why you might need to wait before you trade

If your loan on your current car is still new then you’ll be doing yourself a disservice by trading in. Your car decreases in value just by leaving the dealership, so wait a bit for the cost of your trade-in to even out, meaning you won’t lose as much money.

You may be slapped with a prepayment penalty if you trade in too early. Dealerships make interest off your loan. If you pay off your loan by trading in too early then you’ll be in danger of getting a prepayment penalty to ensure the dealership doesn’t lose too much money.

On the off chance you’ve managed to repay your loan before the trade in-period, you may stand to gain more by trading privately.

What do I need to do before I trade in?

Again, research is key. Know what your car is worth before you trade in, so you won’t be taken advantage of by your trader. They’ll examine your car, so make sure you know about its condition, any faults, its value and how much money you owe on it.

If you still owe money on your car, understand that you’ll be expected to make bigger monthly repayments with higher interest on your new car. As long as you know that then it won’t be hard finding a dealership that will accommodate you. 

The most important bit of all is that you read your contract. Make sure that you read the terms and conditions. Know what you’re signing up for. Take the contract home with you to read it in full before signing. If a trader makes you a verbal offer then get it in writing. It’s all in your best interests.