The Pros and Cons of Trading in a Financed Car


Trading in a financed car is common among car owners who wish to upgrade to a new vehicle before their current car loan is fully paid off. While this is convenient in certain situations, it comes with its own set of advantages and disadvantages. In this blog post, we will delve into the pros and cons of trading in a financed car, helping you make an informed decision.

What Does It Mean to Trade in a Financed Car?

Customer of car signing documents of purchase on folder

Firstly, let’s clarify what trading in a financed car entails. When you have an outstanding loan on your current vehicle, and you decide to trade it in for a new one, the dealership will pay off the remaining balance of your loan. However, this amount doesn’t just vanish; it’s typically rolled into the new car loan. This process has several implications that need careful consideration.

Pros of Trading in a Financed Car

1. It allows you to upgrade to a newer model immediately.

There are many reasons why you may want to trade in your car, but generally, it allows you to quickly upgrade to a newer model. You may be looking for one that may offer advanced technology, better fuel efficiency, and improved safety features, which might not be available in your current vehicle.

Also, if your lifestyle changes – such as expanding your family or needing a more reliable vehicle for a longer commute – trading in a financed car allows you to switch cars easily to cater to your needs.

When selling your car yourself, it may take months before you get an offer, and then wait for the buyer’s downpayment so you can get a new car. But when you trade in, it’s a sure thing – you can get a guaranteed offer and quote.

2. It’s convenient and time-saving.

Thinking if you can try to sell your car on your own? Remember, potential buyers expect it to look spotless, which could mean you are spending a lot on detailing services – and in the end, you may find out they aren’t interested anyway. But guess what? Dealerships are happy to accept your car just the way it is. They also handle all the cleaning and fixing up before it hits their lot. Instead of pouring money into making your current car look great, you could use that cash for a larger down payment on your next vehicle.

The main benefit of trading in a financed car is that the dealership would handle all the paperwork. You simply need to bring your car and sign a few documents, and then you’re done. You don’t have to handle advertising, meet with potential buyers, and negotiate prices – the dealership will do it for you. The trade-in value goes straight towards your down payment. Transferring a car title can be tricky if not done correctly, so trading it in means you don’t have to worry about paperwork. And let’s not forget: trading in means no waiting around for a private sale, no strangers coming for test drives, and no extra repair hassles.  

3. It offers financial benefits.

If your credit score has improved since your last car purchase, trading in might qualify you for a loan with better interest rates, reducing the overall cost. Dealerships often have promotions or incentives for buyers who trade in their vehicles, which can include lower interest rates, cash-back offers, or discounts on the new vehicle.

In some regions, when you trade in a vehicle, you only pay sales tax on the difference between the trade-in value and the price of the new car, potentially saving you money. Conversely, when you sell your car yourself to a private party, you could end up paying more taxes.

Also, you can deal with depreciation if you trade-in. Cars depreciate the most during their first years, so by trading in for a newer model sooner, you might avoid the steep curve of depreciation that affects older vehicles.

4. It gives you the benefit of having an upgraded car. 

For those who prefer to always drive relatively new models, trading in regularly (every few years) ensures you always have a modern, up-to-date vehicle. Newer cars generally require less maintenance than older ones. So, by trading in your vehicle before it ages significantly, you might save on costly repairs and maintenance.

5. It reduces stress.

Newer cars are typically more reliable. This reliability can reduce the stress associated with potential breakdowns or unexpected repair costs that are more common in older vehicles. Plus, the easier process of selling and buying a car through trade-in can save you from a lot of potentially stressful situations.

Cons of Trading in a Financed Car

1. It may increase your debt.

If your car is worth less than what you owe (negative equity), this debt is often rolled into your new loan. This means you’re immediately starting your new loan underwater.

Carrying over negative equity can prolong your debt cycle, as you’re paying off two cars – the one you traded in and the one you just bought. This means you’ll be in debt longer. The new loan will likely be larger, as it includes the unpaid balance of your old loan. This means higher monthly payments.

To keep monthly payments manageable with a higher loan amount, you might opt for longer loan terms, which means paying interest for a more extended period.

To understand this better, learn how dealerships handle your trade-in when you still owe.

2. It can potentially increase your interest rates.

Rolling over negative equity could result in a higher interest rate on the new loan, as lenders might view the larger loan as a higher risk. Over the life of the loan, you may end up paying significantly more in interest due to the combined balance of the old and new loans.

3. It can reduce your bargaining power. 

When trading in a financed car, especially with negative equity, your ability to negotiate the best terms for your new vehicle can be weakened. Dealerships might focus more on the ease of transaction rather than offering you the best deal for your new vehicle.

4. It makes you vulnerable to upside-down loans.

If your new car depreciates faster than you’re paying off the loan (a common scenario with new cars), you could find yourself in a situation where you owe more than the car’s worth for an extended period.

5. It complicates your loan terms.

Understanding the intricacies of rolling over a loan balance, along with the terms of the new loan, can be complex and confusing. When you roll over debt, it can be challenging to keep track of how much you’ve actually paid toward your new vehicle, leading to potential misunderstandings about your financial standing.

6. It can impact your credit score and affect your budget. 

Taking on a larger loan can affect your debt-to-income ratio, potentially impacting your credit score. Also, higher monthly payments and a longer loan term can strain your budget, limiting your ability to respond to other financial opportunities or emergencies.

7. It may cause buyer’s remorse. 

Knowing that you owe more than your car is worth can be a source of stress and financial anxiety. If the financial implications become burdensome, it may lead to regret, particularly if the decision to trade in was driven by impulse rather than careful consideration.

Balancing the Pros and Cons

Car shape keyring and key on calculator

When contemplating the trade-in of a financed car, the first crucial step is to assess your personal and financial circumstances thoroughly. This process involves several key aspects:

  • Evaluating financial status: Examine your current financial situation, including your income, expenses, debts, and credit score. This assessment will help determine whether you can comfortably afford a new car loan, especially if it includes the rolled-over balance from your current vehicle.
  • Understanding loan details: Gain a clear understanding of your existing car loan, including the payoff amount, monthly payments, interest rate, and how much, if any, negative equity exists.
  • Considering car needs: Consider what you need in a vehicle. Do you need more space, better fuel efficiency, or newer safety features? Or are your current vehicle’s capabilities sufficient for your lifestyle?
  • Checking in with long-term financial goals: Reflect on how trading in your financed car aligns with your long-term financial objectives. Will taking on a new loan hinder your ability to save for a house, pay off other debts, or contribute to retirement savings?
  • Emotional considerations: Sometimes, the decision to trade in a financed car is driven by emotional factors, like the desire for a newer model. It’s essential to separate emotional desires from practical financial considerations.

Considering Alternative Options

Before proceeding with a trade-in, explore alternative options to ensure you’re making the best decision:

  • Private sale: Selling your vehicle privately might offer a higher return than a trade-in, potentially reducing or eliminating negative equity.
  • Refinancing the current loan: If your credit score has improved since you took out your car loan, refinancing could lower your interest rate and monthly payments, making it more manageable to keep your current vehicle.
  • Postponing the trade-in: Sometimes, waiting until you’ve paid down more of your current loan or until the car’s value stabilizes can be a wiser financial move.
  • Leasing a vehicle: If you enjoy driving newer models and want to avoid long-term commitments, consider leasing as an alternative to buying.
  • Using public transportation or car-sharing services: In some cases, relying on public transport or car-sharing services can be more cost-effective, especially if you don’t use a car regularly.

Things to Consider Before Trading in Your Financed Car

The decision to trade in a financed car should be based on a thorough, informed analysis:

  • Gathering accurate information: Obtain all necessary information regarding your current loan, the potential new loan, and the value of your current and prospective cars.
  • Assessing your car’s equity: Before deciding, determine if your car has positive or negative equity. This will significantly influence the financial implications of the trade-in.
  • Consulting financial experts: Consider seeking advice from financial advisors, especially for complex situations involving significant negative equity or complicated loan terms.
  • Evaluating market trends: Understand current automotive market trends, including which types of cars retain their value and the best times to purchase a new vehicle.
  • Reading the fine print: Carefully read all terms and conditions of any new car purchase and loan agreement. Be aware of any hidden fees, penalties, or clauses that could affect you financially.
  • Taking time to decide: Avoid rushing into a decision. Take the time to consider all options, implications, and personal circumstances. A hasty decision could lead to financial strain or regret.
  • Understanding the full costs: Calculate the total cost of the new loan, including the rolled-over balance, interest rates, and loan term. Consider if the higher cost aligns with your financial goals.
  • Negotiating separately: Negotiate the trade-in and the new car purchase as separate transactions to ensure you get the best deal on both.


Deciding to trade in your financed car? On the bright side, it’s super convenient, gets you behind the wheel of a newer ride quickly, might save you some on taxes, and, let’s be honest, it feels great to drive a newer model. But it’s not all smooth driving. There are bumps like the chance of owing more than your car’s worth, dealing with a bigger loan (and maybe heftier payments), needing more wiggle room to negotiate, and navigating through a somewhat complex process.

Take a good, hard look and take some time before you decide. Don’t rush to avoid decisions you might regret.

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