Buying a car is a long process that involves doing a lot of research, picking out a vehicle that fits your needs, and negotiating with the seller for a price that is fair to both parties. Perhaps you take out a car loan either from the dealer or with your own bank or credit union. You drive your new car off the lot, and start using it for your transportation needs.
For most people, this is the end of the buying journey. However, some people find that their new car was the wrong choice. Maybe it’s impractical for the local climate or geography. Maybe life circumstances have changed and something that was practical before no longer suits one’s needs. Maybe the buyer just doesn’t like the vehicle as much as they thought they did. Maybe financial circumstances have taken a turn for the worse.
However, there are caveats about trading in a car you just bought. It’s not as simple as just taking it back to the lot. You don’t get your money back, and you are still responsible for the loan. Thus it is important to be strategic about how and when you trade in a car you’ve just financed. It is possible to trade in a vehicle wisely and lower monthly payments. It is also possible that payments will skyrocket if you don’t trade your vehicle at the right time.
Here is everything you need to know about trading in a car you’ve just bought.
The Value of Value
Every vehicle has a value depending on whether it’s new, what condition it is in, and the vehicle’s maintenance and accident history. The value of a vehicle can be researched online, and guides like Kelley Blue Book or Edmunds are reputable sources for this figure. Knowing the value of the car you purchased is as important as knowing the value of one you want to buy.
An important note about the value of a vehicle is depreciation, which is a reduction in value based on use. Vehicles depreciate most in the first year, and the act of simply driving a brand new car off the lot contributes to depreciation because it changes the car’s status to “used,” even if you make an immediate u-turn to trade it back. Thus it is vital to know how depreciation may affect your trade because it will determine what cost there may be to you.
What Is Equity?
If you have a loan on your new car, the value of your vehicle when you purchase it has been calculated into the amount of your loan. So have fees and interest, but not the depreciation. That means that if your car was worth $20,000 new and depreciates to $18,000 upon being driven the first time, your loan remains $20,000 even though your vehicle isn’t worth that much. The value of a vehicle you are planning on trading in must be weighed against the amount remaining on your loan.
Equity is how much of the vehicle you own weighed against the value of the vehicle. When you have a loan on a car, the lender owns the amount of the loan you haven’t paid yet. The remaining share is your equity in the car. There are two kinds of equity, negative equity and positive equity.
Many vehicle loans start out with negative equity since the car depreciates so much in the first year. What this means is that the loan company owns more of the car than you do based on the vehicle’s value versus the amount of the loan, so if you have negative equity it means you owe more on the car than it is worth.
Sometimes the amount of the loan is less than the vehicle’s worth, and this means the buyer has positive equity. It usually takes at least a year to build positive equity on a car loan, and can take up to a few years based on factors such as interest, fees, and condition of the car throughout the life of the loan. However, there are plenty of scenarios where a buyer might have positive equity early. If you built enough equity through trading another car in or made a high enough down payment on the new one, you may even start with positive equity or will build some very quickly.
All vehicles have a value, and loan amounts and equity are determined from this base worth. The trade-in value of a vehicle is what the vehicle is considered to be worth in standardized terms. This is the number you will find when checking the price of the vehicle. For used cars, this is usually a range rather than an absolute number, and the amount changes year by year as the car depreciates. Your lender will have a valuation of your vehicle at any given time, so this is the most important value you want to work with if you are planning on trading the car.
Loan Payoff Amount
In a hypothetical situation in which you paid your loan off today, the loan payoff amount is the amount necessary to accomplish this. Your lender will usually provide a payoff amount that includes all fees and interest to date, which means your loan payoff amount changes daily. However, if you are trading in a car that you are still paying off, the loan payoff amount will figure into your trade. When you trade your car in, the dealer is essentially buying it, which means they are paying your loan. The remainder of the loan is then added to the price of the new car. This makes your loan payoff amount an important consideration if you decide to trade in a car you just bought.
Covering Negative Equity
Since the odds are pretty high that the car you just bought and now want to trade has negative equity attached to it, you may feel stuck with a vehicle that has become impractical or too costly. While negative equity can be daunting when it comes to trading in a car you just bought, it can still be overcome with planning and strategy.
Be aware, also, that some dealers will not take a car that has negative equity. When a dealer accepts a trade-in, they are looking to resell the car you are trading in. Negative equity means the dealer must pay more for the car than they are able to sell it for and some dealers don’t want to assume that risk. Make sure the dealer you choose will accept your vehicle as a trade-in if you have negative equity.
Here are some options you have if you are trying to trade in a vehicle that you just bought.
- You can roll over the old loan to a new loan by applying your vehicle’s equity to the purchase of another vehicle. If you have negative equity, this will make your monthly payments higher as the old loan is merged with the new.
- Pay the difference between any negative equity you have on the trade-in and the price of a new car. This can be daunting if you just bought the trade-in, though, as the difference will be nearly the entire cost of the car.
- Wait until you have positive equity in the car you have. This could take around a year and sometimes more, but could save you thousands and prevent you from defaulting on your current loan. Positive equity is leverage you can use against the price of a new car.
- Take out a personal loan to cover the negative equity. This means you are paying two loans instead of one, but this may be a simpler option in some situations because you may get different rates and options on a personal loan.
- Sell the car privately rather than through a dealer. This may take longer and requires you to do your own marketing, but you have an increased chance of covering any negative equity if you can make the right deal. From there, you can make your loan payoff and take out a new loan for a new car.
- Trade for a less expensive car so that any negative equity is balanced out by the value of the new car. This means your monthly payments would stay roughly the same and you get a car more conducive to your needs, but at a lower price.
- Trade in your car for a lease rather than looking to own. A lease is similar to a loan in structure, except you are borrowing the car for a price rather than paying to own it yourself. Leases can cost hundreds less each month than a car payment, but the payments on your loan will be added to the lease.
One notable exception when it comes to trading in a car you just bought is when the car comes off the lot with a mechanical problem. Some states have “lemon laws,” which protect buyers from being sold a car that just doesn’t work. Lemon laws ensure that if a vehicle was sold to you with a defect, you are able to get what you paid for. Used vehicles may be sold “as is,” but there are still limits to what that can entail. “As is” does not give dealers a right to sell you a vehicle that is going to fall apart within days of purchase.
If you suspect that your vehicle is defective, don’t hesitate to check the lemon laws in your state and bring it back to the dealer. The longer you wait, the less chance your vehicle will qualify under lemon laws because it will be harder to prove that the malfunction was not from use.
While trading in a car you just carry a lot of obstacles to be aware of, it isn’t impossible. There are enough avenues to cover a trade for a new car that if you really need to, you can find a way that you can afford. It is just a matter of planning ahead, knowing how much you owe, and being smart about your trade-in.