Want to trade in your car for a new, better or more affordable model but you still have not paid out the loan on the vehicle? The question you should be asking yourself is whether you can sell a vehicle with an outstanding loan and if so, how early can you trade in a financed car?
Here is the lowdown on selling a car with finance owing.
Can You Trade in a Financed Car?
Yes, you can trade in a financed car even if you’re still making payments on it. You can swap the vehicle for a new one at a dealership or sell it privately.
One of the biggest advantages of trading in a financed vehicle is that you can use the money from the trade-in to pay off your existing loan, leaving you debt-free.
However, not all lenders may allow you to trade in a financed vehicle, especially if you have a secured car loan. What’s more, the money offered by the dealer may not be enough to pay for the outstanding loan, which means you will have to dip into your savings and cover the gap.
Factors to consider before trading in a car with finance owing
These are the things you need to think about before you trade in a car with an outstanding loan.
1. How much do you owe on the loan?
The first thing to do is check the terms and conditions of your car loan so you can determine whether trading in your car is worth it.
Read through your car loan agreement or better yet contact the lender directly to get answers to these questions
- How much is the outstanding balance?
- How long do you have left on your loan?
- Does your lender charge any exit or early termination fees?
The last one is especially important—should the extra charges prove too high, it might be better to wait until the loan term is finished to trade in your vehicle.
2. Do you have a secured loan?
Car loans can be secured and unsecured. As the name suggests, a secured car loan is one where the vehicle is encumbered, i.e. bearing the load, rather than the owner. Put simply, the car belongs to the lender until the loan is discharged and the title is cleared.
If this is the case, you will need the lender’s permission before you can trade in your vehicle. You will have to notify your insurer too, who should cancel the third-party coverage on your existing vehicle and transfer the policy to the new one.
While contacting the lender is not required with an unsecured car loan, the fact remains that the vehicle comes with a debt attached to it which might put dealers or private buyers off the purchase.
3. How much is your car worth?
When establishing the cost of your vehicle, it’s important not to rely on the dealer’s estimate alone as not all car salespeople will give you a fair price. Do some research beforehand and compare similar models online, use a trade-in calculator or carry out an in-person valuation. The best course of action, though, is to contact multiple car dealerships and compare prices to find the best deal.
Determining the value of the car will also tell you if you are in a position of positive or negative equity.
If the amount you owe on your loan is higher than the vehicle’s value, you have negative equity.
Let’s say your car is valued at $10,000 (which based on car sales statistics is the average price of a used car in Australia) and you owe $12,000 on your loan. You have negative equity and will need to cover the remaining $2,000 of your loan yourself.
You have three possible options in this situation:
- Consolidate the negative equity into a new car loan—while this is a practical option, it might leave you with higher repayments that could push you into a similar situation or debt. What’s more, most lenders have limits on how much negative equity you can refinance, thereby limiting how much you can borrow for a new car loan.
- Pay the difference between the trade-in value and your remaining balance by digging into your savings or taking out a personal loan (or both).
- Don’t trade in the car until your loan term is up—this way you are also saving on break fees and administrative charges.
On the other hand, if the trade-in value of the car is enough to cover the outstanding loan amount (plus any extra charges that your lender might impose for paying off your loan early), you have positive equity.
Continuing with the same example, you have positive equity if your car is valued at $10,000 and you owe $6,000 on your loan.
In this case (provided your lender agrees) you can use the trade-in to pay off your loan. Alternatively, you could arrange for the dealer to repay the lender directly, i.e. offer you a net sum by deducting the remaining balance on the loan from the trade-in price.
Keep in mind that the above is a simplified example that doesn’t account for a car loan with a balloon payment or the cost of the new vehicle.
4. The price of the new vehicle
If you are upgrading to a more expensive car, you will probably have to take out a new and bigger loan which comes with higher monthly repayments. Carefully crunch the numbers to check whether you can meet the payment terms for your upgraded vehicle.
How Early Can You Trade in a Financed Car
Technically, you can trade in your financed car whenever you like.
Ideally, though, you should do it towards the end of the loan term—your outstanding balance will be lower, giving you more wiggle room to upgrade to a newer, more advanced model.
On the downside, the longer you own and use the car, the more it depreciates in value, so you might not get a good price from the dealer. In fact, it is estimated that the value of your vehicle drops by 20% as soon as you leave the showroom and by 58% within the first three years.
To get the best price for your vehicle, make sure you keep it in good condition and get it serviced on a regular basis—the cost of a routine check-up can be as low as $150, but can go a long way towards keeping your car in good shape.
Selling a Car With Finance Owing: What Are Your Other Options?
Sometimes, trading in a financed vehicle may not be the best idea. If you’re set on selling a car with finance owing, there are a few other alternatives you can explore.
Sell the car privately
If the sale price of the car can cover the outstanding balance on your loan, you could sell the vehicle, use the money to pay off the loan, and then apply for new financing for the new ride.
Should you go with this option, you need to inform the buyer that the car is not completely paid off, as well as your lender. Your loan terms might not allow for the sale of the vehicle while it is still under finance.
Refinance your car loan
Refinancing a car loan can make it easier to manage monthly payments, especially if your credit score has improved and you are able to qualify for lower interest rates.
If you are considering this option, check whether it is possible to refinance your car loan with the same lender. Switching lenders usually entails high exit penalties and new application fees, which might make this a costly alternative.
Pay off the loan before you trade in the car
If you’re lucky enough to have money set aside, you could use your savings to cover your existing loan and sell your car without any debt attached to it.
Another option is to use the redraw facility on your mortgage (if you have one). However, this is a risky move as it might affect your home loan repayments and put your house at risk if you default on the loan.
You may also take out a personal loan. Personal loans tend to have lower interest rates than unsecured car loans, but keep in mind that the amount you borrow (which according to personal loan stats ranges between $15,000 and $16,000) might not be enough to cover the loan on your vehicle.
Bottom Line: Should You Trade in a Financed Car?
While it is possible to trade in a financed car, it may not be the best idea, especially if
- You have a secured loan—you will have to get the lender’s permission beforehand
- Your lender has high fees for paying the loan ahead of schedule
- Your car has not been serviced properly causing its value to drop
- The trade-in price for your vehicle is higher than what you owe on the loan, i.e. you have negative equity
If you decide to trade in your financed vehicle, make sure you
- Check how much you owe on the loan
- Consult your lender regarding the type of loan you have and the fees they will charge for paying off the loan early
- Visit several dealerships to find the best price
- Calculate if the price offered by the dealer is enough to cover the overall cost of the loan (the outstanding amount and the extra fees).
1. What happens if I buy a car with outstanding finance in Australia?
If you buy a car that has been used as security for a loan and that loan has not been paid off, the car could be repossessed by the lender and you would end up losing money. That’s why it is important to buy a vehicle from reputable dealerships—a dealer will inform you if there is any debt attached to the car.
If you are buying from a private seller, make sure you do your due diligence and look into the car’s history. Should the car come with an unpaid loan attached, you might be able to use it as a bargaining chip and get a lower price.
2. How to sell a car privately with outstanding finance?
The only difference between selling a car with finance owing and one without is that you need to inform the buyer that the vehicle comes with a debt attached. While this might put some buyers off the purchase, others could use it to lower the price of the car.
3. Can you trade in a financed car after 6 months?
Yes, you can trade in a car whenever you like, just keep in mind that the price you get from the dealer might not be enough to pay off the outstanding loan balance and any early termination fees your lender may impose.
4. Can I trade in a financed car early?
Yes, as mentioned above there is no rule saying how early you can trade in a financed car. However, it is advisable to trade in your vehicle towards the end of your loan—this way your outstanding balance will be lower and easier to pay off in full.