Can you trade in a car you still owe on?

Can you trade in a car you still owe on?

Trading in your existing car for a newer or bigger car can be exciting. However, it can get complicated if you’re still repaying a car loan on the vehicle. You’ll probably need to discuss the car swap with your lender and get their permission. Also, if you’re selling to a dealer negotiating the trade-in value can be a challenge. If you don’t get the price you’d like for your car, you may end up deepening your debt if you also take out a loan to buy the new car. Ideally, you should check if you can completely repay your car loan before taking on new debt.

How do I sell my car with a loan?

If you want to sell your car but still have a car loan outstanding, the type of loan you have can be crucial. You may have applied for a secured car loan, in which case the car is encumbered, or bearing the loan, no matter who owns it. Add to this that, technically, the car belongs to the lender until you discharge your loan and clear the title. You won’t be able to sell your vehicle without permission from the lender in this situation. You may also need to pay additional charges if you want to repay your loan early before selling the car.

You can also discuss whether you can remove the car’s encumbrance if your loan is secured against your car. If you have enough savings, you could use it to cover the difference between the outstanding loan amount and your car’s sale value. 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.

With an unsecured car loan, you may not have an option but to repay the loan in full before selling, especially if the potential buyer refuses to buy the car otherwise. In this case, you’d want 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.

What happens if I trade in a financed car?

You can trade-in your financed car, but you’d have to discuss your situation with the car dealer. This can help determine if your current car’s trade-in value can cover your outstanding car loan balance. You should also make sure that you’re getting favourable terms if you’re taking out a new car loan, as well as getting a good trade-in value for your present vehicle. The alternative could be racking up an amount of debt that you’d struggle to repay.

When looking to buy a new vehicle while still repaying a car loan, you might want to think about using this checklist of questions:

  1. Is your current car loan a secured one? If yes, you’ll need to get your lender’s permission before proceeding with the trade.
  2. Are you able to repay your existing car loan entirely? If not, you’ll need to ensure that the sum you get for your car is large enough to cover your outstanding loan.
  3. Are you upgrading to a more expensive car? If yes, you’ll need to calculate whether your future car loan could make your overall debt unmanageable.
  4. Have you shopped around for a car dealer who can offer the trade-in value necessary to take care of your loan? If yes, you won’t have to worry about your current car loan and, once you’ve agreed on the trade-in value, you could even ask the dealer to repay your lender directly.

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What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What is collateral?

Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.

How much is my car worth?

If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.

Your car’s worth can depend upon various aspects, including:

  • Age
  • Condition
  • Model and make

A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.

Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

What is an establishment fee?

Some lenders will charge you an establishment fee, or one-off upfront fee, to cover the cost of setting up your car loan.

What is a commercial hire purchase?

A commercial hire purchase, or CHP, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. Once the final payment is made, you take ownership of the car. 

What is an upfront fee?

An upfront fee is a one-off fee that many lenders charge when you take out a car loan.