What happens to a existing car loan when trading your car?

When you trade your car while still having an existing car loan, the process depends on whether you have positive equity (you owe less than the car's worth) or negative equity (you owe more than the car's worth). Here's what typically happens in both scenarios:

1. Positive Equity: If you owe less on your existing car loan than its value, here are the general steps involved:

a. Check the Payoff Amount: Contact your current lender to obtain the payoff amount for your existing car loan. This represents the amount required to settle the loan in full.

b. Evaluate Trade-in Value: Determine the trade-in value of your car from the dealership where you plan to trade. Be sure to negotiate for the best possible price.

c. Equity Calculation: Subtract the payoff amount of your current loan from the trade-in value. If the result is positive, you have positive equity.

d. Loan Settlement: The dealership will usually help you settle your existing car loan using the trade-in value as partial payment. The remaining positive equity, if any, will be applied to the new car purchase or given to you in the form of a check if the trade-in exceeds the loan payoff.

e. New Loan: If the trade-in doesn't cover the full amount of the new car, you'll need to secure a new loan or pay the difference outright to complete the purchase.

2. Negative Equity (Upside-Down Loan): If you owe more on your existing car loan than the trade-in value, the process is slightly different:

a. Determine Negative Equity: Calculate the negative equity by subtracting the trade-in value from the outstanding loan balance.

b. Include Negative Equity in New Loan: The negative equity amount will be rolled over into the new car loan. This means that your new loan will include the balance from the old loan and the negative equity amount.

c. Larger Down Payment: To compensate for the negative equity, you may be required to make a larger down payment for the new car. This is because the lender wants to ensure that the loan-to-value ratio is lower and the risk of default is reduced.

d. Higher Monthly Payments: The negative equity can result in higher monthly payments for your new car loan since you'll be borrowing a larger amount.

It's important to carefully consider your options, including comparing interest rates and payment terms, before making a decision about trading in your car while you still have an existing loan.