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How Soon Can You Trade In A Financed Car?

Hanna Kielar4-Minute Read
March 07, 2022

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You can technically trade in your car after 6 months or 6 minutes, but you should do a little research to make sure it makes financial sense for you. If you worked with a finance company to take out a loan, you’ll remain legally responsible for paying out the loan balance, regardless of whether you make it to the end of the loan term.

In this guide, we’ll talk about how to calculate the cost to swap your car and when it makes sense to trade in a financed car.

Should You Trade In A Financed Car Early?

Legally, you can trade in your car under loan at any time. The question here isn’t so much about if you should trade in your car after a year or 2, but rather how much money you stand to lose or gain at any point in the loan term.

Equity is the difference between the trade-in value of your vehicle and your remaining loan balance. You have equity in your car – you just need to find out if it’s positive or negative.

The first step is to find out how much your car is worth. Then, subtract the current loan balance and any prepayment penalties associated with your loan. A prepayment penalty is a lender fee you must pay, only if you pay off your loan early. It’s something you would have agreed to in your auto loan agreement. The easiest way to find out if you have a prepayment penalty is to find the electronic agreement and “Ctrl + F” search for the term “prepayment,” or contact your lender to inquire about the situation.

What you do next depends on whether you have positive or negative equity.

When You Have Positive Equity

Your best-case scenario is that you have positive equity in your vehicle. This means you can sell your car for more than you owe on it. In other words, you stand to pay off your loan and still pocket extra cash from a sale. When you trade in your car, the equity from your current vehicle can be used as a down payment for your new car.

When You Have Negative Equity

When you owe more money on your loan than you could sell your car for, that means you have negative equity. Don’t be alarmed – many borrowers find themselves in this situation, especially at the start of a loan term, and it’s not the worst thing. You still have some good options.

  • Pay off the remaining balance out-of-pocket. If replacing your vehicle is urgent and necessary, we recommend digging into your savings to settle the finance agreement with your lender. Be sure to call your lender before you head to a dealership, however, to understand how their process works.
  • Wait until your car has positive equity. If you financed a new car, you’re likely to be upside down on your loan within the first minute after driving off the lot. New cars depreciate significantly faster than used cars – a 10% decrease in value in the first minute after driving off the lot. It makes more financial sense to trade your car in after 1 year, after you’ve enjoyed it a bit longer. As a general rule, you should trade your car in after 2 years minimum, for a better chance at positive equity.
  • Trade in for a smaller car. Sometimes, you don’t have the benefit of time to wait until your car gains more equity. You could trade in your car for a lower payment – get a cheaper, smaller car. We compiled the best cheap cars on the used market, just for you.

If you’re feeling a sense of urgency around this decision, if nothing else, avoid these situations:

  • Don’t roll negative equity into a new loan. While it’s possible for you to roll your outstanding loan balance into a new car loan, it isn’t prudent. You’ll essentially be paying more in interest on that amount of money and can increase your chances that your next loan will remain upside down. When you borrow more than what the car is worth, you’re setting yourself up to be in a possibly worse position down the line.
  • Don’t hyper-focus on monthly payments. If you decide to trade in a car with negative equity, don’t be fooled by lower monthly payments at the expense of paying more interest over a longer period of time. Be sure to compare the amount of interest you’ll pay over time as you’re comparing loans.

Alternatives To Trading In A Car You Still Owe On

There are plenty of reasons to trade in a car that have nothing to do with being tight on cash. If you need a car best suited for growing families, or to continue a passion for off-roading, trading in makes sense when you have positive equity. If money is the issue, read on for some alternatives.

Sell Your Car Privately

You’ll make more money off a private party sale than a trade-in, though you’ll have to spend much more time advertising, meeting with potential buyers, and learning how to sell a car with a loan. You also take more risk by selling privately since you’ll most likely receive an unsecured payment. Still, if you have the time and resources, this may be a good option for you.

Refinance Your Auto Loan

Refinancing your car makes sense if your credit score has improved since you took out your existing loan. You may be able to get a better interest rate that will save you on monthly payments and over the long term. You may even choose to extend your loan term, though we only recommend that if you get a better interest rate that would allow you to pay the same or less interest over time.

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The Bottom Line: It’s Not When, But How Much You’ll Save

You can change your financed car right away or years later, but what matters is at which point you’re slated to save money. It doesn’t make sense to trade in your car the moment you take it off the lot, since a change in ownership will likely have depreciated the value below your loan balance.

Trade in the car when you know you need a better car to fit your evolving needs or when you stand to make a profit. Otherwise, it may be worth just keeping your car for a while longer. If you do decide to sell, make sure you’re as strategic and savvy in getting the best deal buying your next car.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.