Sometimes it takes a few weeks or a few months to realize that either a car is not for you, or the loan you’ve taken out to get it is too much to handle, but what’s your next step? Can you just take the car back to the dealership and get something else? You can, but naturally it’s not as simple as that. This article will walk you through the process.
Know Your Equity
There’s two possible ways you can be entering this situation, with positive equity or with negative equity, which one you have will determine how this goes. To put it simply you have positive equity if the remaining loan is less than what the car is worth and you have negative equity if the remaining loan is worth more than what the car is worth. This means if you tried to sell the car, you’d be making a loss because you’d have to pay off the loan first, and the price of the car wouldn’t cover it.
This can happen because cars depreciate value over time, especially in the first few years of ownership, so if the car purchase is still recent you probably have negative equity on it.
How Trade-Ins Work
In a regular situation when loans aren’t involved a trade-in is quite simple, you take the car into the dealership and they take the value of the car you take in and apply it to the next car you want to buy, so if your car is worth $4000 and the car you want it worth $20,000, when you trade in the old car you can reduced the price of the next car to $16,000.
Trade-ins with loans work the same way but with the additional complicating factor of the loan, and of course the equity of the loan plays an important role too.
With Positive Equity:
Positive equity keeps all of this nice and simple, the remaining amount of the loan is simply subtracted from the value of the car, and whatever is left is transferred to the next car. To add to our example before let’s say you owe $2000 on the loan. $4000 – $2000 = $2000. The cost of our next car will be $18,000.
With Negative Equity:
With negative equity the calculation to do is the same but the consequences are a bit different. Let’s say you owe $5000 on the loan still, well $4000 – $5000 = -$1000. You can now apply negative money to the next car purchase? Sort of. There’s two things that can happen here.
Either you can pay the dealership a lump sum of $1000 to clear the loan entirely, or you can roll that $1000 into the car loan for the next car. Some dealerships will strongly recommend this, and while it may be convenient, it will increase your monthly payments and interest on the next car loan, which might end up defying the whole point of trading in if you don’t opt for a significantly cheaper car.