What happens if you trade in a financed car?

Selling a car with a car loan still outstanding is possible, though the difficulty may be affected by the type of loan you have. For example, if you applied for a secured car loan, then the car is encumbered, or bearing the loan, no matter who owns it. Technically the car belongs to the lender until you discharge your loan and clear the title. In this situation, you may not be able to sell your vehicle without permission from the lender. You may also need to pay additional charges if you want to repay your loan early before selling the car.

With an unsecured car loan, you may need to repay the loan in full before selling, especially if the potential buyer refuses to buy the car otherwise. In this case, you may want to try to recover the entire cost of your car loan through the sale. Ask your lender about any additional charges you’d need to pay if you end your loan term early, before deciding the sale price. For instance, some lenders will charge a break fee and a cost-recovery fee and administration charges.

You may also need to contact the car’s insurer before selling. The insurer may not be able to transfer a comprehensive car insurance policy from one vehicle to another if the lender still has a financial interest. 

If you want to sell your car privately or trade it in for another vehicle while there is an outstanding loan, here are some things you must consider:

• Find out the exact amount still outstanding on the car loan.
• Crunch the numbers and double-check if it is possible for you to repay the outstanding balance before selling it or trading in, as this may help make the process faster and easier.
• Check if the lender will charge any break fees or other charges if you repay the loan before the end of the loan term.
• Read the loan agreement to see if it mentions anything about being allowed to sell or trade in the vehicle before the entire amount is paid off.

If you have a fixed rate car loan, the lender may charge early exit fees if you repay the amount before the end of the loan term. In some cases, the lender may also factor in the estimated interest to ensure it receives the money as per the original agreement. You should check the loan agreement to understand these fees. The exact amount will vary from one lender to another.

Another consideration is the age of the car when you first applied for the auto loan vs the age and condition of the car when you’re looking at trading it in. The age and current condition of the car will affect its current value. If your car’s current value is less than the loan amount, you’ll need to pay the difference on your own, rather than through a trade-in, to receive clearance from the lender.

If your loan is secured against your car, you may be able to discuss with the lender whether you can remove the car’s encumbrance. For example, if you have enough savings, you may be able to use it to cover the difference between the outstanding loan amount and your car’s sale value.

Although you do have the option to trade in a car before it is paid off, you may also want to compare some of the other available choices. These include:

If your car’s sale price will be enough to cover the outstanding loan balance, this can be a simple way to pay off your debt. However, you’ll need to check your loan’s terms and conditions and discuss them with your lender to make sure you can sell the car before the loan term is up. This option will not work if you want to trade in the car for another vehicle.

Refinancing your car loan with new terms and conditions may offer more flexibility and greater control. With the new terms, you may get a lower interest rate, a longer loan term, or switch from a secured loan to an unsecured loan. 

Having an unsecured loan may allow you to trade in or sell the car without requiring the lender’s permission. However, an unsecured loan often comes with a higher interest rate, which can hurt your budget.

Keep in mind that the interest rate, terms and conditions you may be offered on a car loan may depend on a range of factors, from your income to your credit score. If possible, you could consider taking steps to improve your credit score first before you consider refinancing, to increase your chances of getting a deal that suits your needs.

Paying off the car loan is an option if you have the available finances. For example, you could use your savings to repay your loan amount. Alternatively, you could consider taking out a personal loan at a lower interest rate to repay the car loan, similarly to a debt consolidation personal loan. Ensure you check the interest rate and fees before applying for a personal loan like this, so you don’t accidentally end up paying more than you planned.

Another option might be to redraw from your mortgage to cover the outstanding balance on your car loan. You can then sell your car without having the loan still on it. You do have to consider if you take this approach you may be making your home the security for your car loan. Consider checking how using your redraw would change your mortgage repayments. You want to make sure you can comfortably manage the repayments, so you don’t risk your home.