Young couple signing documents at car dealership.

How Soon Can You Trade In A Financed Car?

Victoria Araj7-minute read
PUBLISHED: March 24, 2024


Whether you’d like to trade in your car after 6 months or 6 minutes, the key is being sure the timing makes sense for you. If you took out a loan to pay for the car, you’ll remain legally responsible for paying the loan balance even if you trade in the car before the loan term ends.

Let’s explore how to calculate the cost of swapping out your vehicle and when trading in your car is the logical choice.

Can You Trade In A Financed Car Early?

Legally, you can trade in your car under loan at any time. Whether you should trade in your car after a year or 2 years depends on how much money you stand to lose or gain. This amount will vary based on the equity you have in your car.

Equity is the difference between your vehicle’s trade-in value and your remaining loan balance. You have equity in your car – you just need to find out if it’s positive or negative. The first step is uncovering how much your car is worth. Then, subtract the current loan balance and any associated prepayment penalties.

A prepayment penalty is a lender fee you must pay if you pay off your car loan early. You would have agreed to this in your auto loan agreement. An easy way to find out if you have a prepayment penalty is to review the electronic agreement, if you have one. When the electronic agreement is open, you can use the search feature and look for the term “prepayment,” or you can contact your lender to inquire about the situation.

Your next step will depend on whether you have positive or negative equity.

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When You Have Positive Equity

Your best-case scenario is having positive equity in your vehicle. This means you can sell your car for more than you owe on it. In other words, you stand to pay off your loan and still pocket extra cash from a sale. When you trade in your car, you can use the equity from your current vehicle as a down payment for your new car.

When You Have Negative Equity

When you owe more money on your loan than you could sell your car for, you have negative equity. If you financed a brand new car, you’re likely to be upside down on your loan within the first minute after driving off the lot. New cars depreciate significantly faster than used cars – and usually see a 10% decrease in value on the day of purchase.

Don’t be alarmed – many borrowers find themselves in this situation, especially at the start of a loan term. You may still have some good options. These include:

  • Paying off the remaining balance out-of-pocket: If replacing your vehicle is urgent and necessary, you could dig into your savings to pay off the loan. Be sure to call your lender before you head to a dealership so you understand how their process works.

  • Waiting until your car has positive equity: Trading in your car after 1 year makes more sense than doing a trade-in after the first few months or even half a year. As a general rule, you should trade your car in after a minimum of 2 years for a better chance at positive equity.

  • Trading in for a less expensive car: Sometimes, you don’t have the benefit of time to wait until your car gains more equity. You could trade in your car for a lower payment by getting a cheaper, smaller car.

If you’re feeling a sense of urgency around this decision, if nothing else, avoid these situations:

  • Rolling negative equity into a new loan: While rolling your outstanding loan balance into a new car loan is possible, it isn’t prudent. You’ll likely pay more interest on that amount of Plus, it can increase the chances of your next loan remaining upside down. Borrowing more than a car is worth can set you up to be in a worse position down the line.

  • Hyper-focusing on monthly payments: If you decide to trade in a car with negative equity, don’t let lowermonthly payments fool you. You’ll still likely pay more interest over a longer time. Be sure to compare the totalamount of interest you’ll pay as you compare

How To Trade In A Financed Car

If you want to move on from a car you’re still paying for, you can follow these steps to trade it in for a new ride.

1. Find Out What Kind Of Equity You Have In Your Car

As mentioned above, you should start the trade-in process by seeing how much car equity you have. To do this, you’ll first determine your car’s value. You can use online tools such as Kelley Blue Book’s car value calculator to get an estimate. Once you know how much your car is worth, subtract your outstanding loan balance from that amount.

If the answer is a positive number, you have positive equity. For example, suppose your car’s trade-in value is $10,000 and you owe $7,000 on your car loan. This means your positive equity is $3,000. You can pay off the $7,000 balance with the money you get from the trade-in and put $3,000 toward a down payment on your next car.

On the other hand, if the answer is negative, your equity is negative. Suppose you owe $14,000 on your loan for a car worth $10,000. Your negative equity is $4,000, which you’d have to pay off or roll over into your new car loan. In this case, you may want to consider paying off the balance to avoid taking out a loan for more than your new vehicle is worth.

2. Decide How Much New Car You Can Afford

Once you know whether you’ll get money to pay off your loan and put toward a down payment, you can set a new car budget. Consider how much you have for a down payment, the monthly payment you can afford and ongoing car ownership costs, such as car insurance and repairs.

You may want to explore auto loan interest rates if you plan on financing your new vehicle purchase. This way, you can figure out how much you can expect your new car payment to be. If you have a loan balance you plan to roll into your new loan, be sure to factor it into your new loan amount.

3. Get Your Current Car Trade-In Ready

Make sure your car is in trade-in condition before you bring it to the dealership. Aside from repairing mechanical issues, gather necessary documents, such as:

  • The car’s title
  • Registration documentation
  • Proof of insurance
  • Maintenance and repair records

You should also have user manuals in the vehicle for potential future owners. And, don’t forget to take all your belongings out of the car.

You may be able to maximize the purchase price a dealership offers by repairing minor cosmetic damage or getting your car detailed.

4. Explore New Car Options

As you begin car shopping with your budget in mind, think about why you’re trading in your financed vehicle. Maybe you need a car with more space to meet your evolving needs, perhaps for a growing family. If you want to lower your car payment, you may need to downsize or go with a cheaper model.

With your motive in mind, you can narrow your search to find a car that checks all your boxes.

5. Finalize The Deal

Once you know how much you’ll get from the trade-in and you have a new car in mind, you can work with the dealership to close the sale. You’ll likely have to fill out paperwork for the old and new car, as well as any financing paperwork if you take out a new loan.

After you finalize the deal, check with your original lender to make sure your old loan is paid off, regardless of whether you transferred the balance to your new loan or paid it off in full.

Alternatives To Trading In A Financed Car

Not every reason to trade in a car is driven by being tight on cash. Perhaps you need a car better-suited for a growing family. Or, maybe you’d like to continue a passion for off-roading. In such cases, trading in your car can make sense when you have positive equity. If money is the issue, check out the alternatives spotlighted below.

Sell Your Car Privately

You’ll probably make more money off a private-party sale than a trade-in. But, you’ll likely have to spend more time advertising, meeting potential buyers and learning how to sell a car with a loan. You also take on more risk by selling privately since you’ll likely receive an unsecured payment. Still, if you have the time and resources, this may be a good option for you.

Refinance Your Auto Loan

Refinancing your car loan can make sense if your credit score has improved since you took out your original loan. You may be able to get a better interest rate and save on monthly payments and over the long term. You may even choose to extend your loan term, which is only a good idea if you’d pay the same or less in interest over time.

Final Thoughts

You can trade in your financed car right away or years from now, but what matters is being in a position to save money when you decide to trade. You may not want to trade in your car the moment you take it off the lot, since an ownership change may depreciate the vehicle’s value below your loan balance.

It’s best to trade in the car when you stand to make a profit, know you need a better car to fit your changing needs, or both. If you’re facing neither scenario, it may be worth keeping your car for a while longer.

If refinancing your existing car loan seems like the right option, start a personal loan application online with Rocket LoansSM today. 

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.