Just bought a car that you are considering trading in but are unsure whether that is an option? There is no rule restricting trading in a car right after buying it, but you will want to think twice before doing so. Continue reading to learn more about how long you should wait and why, before you trade in a vehicle you just bought. Additionally, you will find more information about car trade-ins and alternatives.
Recommended Wait Time Before Trading in a Car?
Generally, you will want to wait a minimum of two years before trading in your vehicle because it will help compensate for that depreciation that happens right after it is driven off the lot. All cars lose about 10% of their value when they are driven away after a purchase!
Two years is a general guide. However, instead of focusing on a specific time, it will be better to consider the equity you will have in your vehicle. You will want to trade in your car with a good amount of positive equity rather than negative equity. More on that below.
Understanding Whether You Have Positive or Negative Equity
Equity is the difference between the amount of money you paid on your car loan (or outright) vs. the resale value of your car. Equity can be positive or negative. Positive equity will mean that the value of your vehicle is higher than what you paid for it. While negative equity will indicate the value of your car is currently less than what you paid for it. Another name for a loan with negative equity is an upside-down loan.
It will be in your best interest to trade in your vehicle when it has positive equity, which usually takes a few years! And that is where that two-year general recommendation comes in, as it takes about that much time to build positive equity.
What To Do if I Want to Trade In My Car With Negative Equity?
If you have negative equity in your car but still want to or have to trade it in, you can definitely do so. Here are the best ways of going about it:
Pay Off as Much of the Existing Auto Loan Balance
One thing you can do to make finances less messy when getting a new car loan and vehicle, with negative equity, is to pay off the existing loan as much as you can out of pocket. Ideally, you will want to have your car loan completely paid. This can help alleviate the burden of the interest you will need to continue paying with a new loan taking over.
Trade for a Cheaper Car
If you are facing an emergency and need to trade in your car right away, you may want to trade it in for something cheaper instead of getting a more expensive vehicle. A cheaper price tag will mean a lower car loan. Less money financed is less of a monthly payment, which can be helpful if your finances have changed.
Don’t Roll Your Current Loan Amount Into Your New Loan
Another thing you should avoid when trading in a car with negative equity is that if you financed it, do not roll your current auto loan with your new one! It will mean paying extra interest and even more for a new car, starting the negative equity cycle again.
Increase Your Down Payment
The more you can pay upfront, the less you will have to finance, and this way, you can avoid losing money to interest! And so, allocate as much money as you can towards your down payment.
Things to Keep in Mind if You Financed Your Car
Most people finance a car through an auto loan. And if you also financed your vehicle, you need to consider that the trade-in will mean paying back your previous lender in full. Some lenders may have early payment penalties. So, it is essential to keep that in mind before paying off your existing auto loan with a trade-in and a new loan.
How Does a Trade-in Work Exactly?
If you have never traded in a car, you may wonder how it works. The basics of a car trade-in are relatively simple, you trade in your old car for a new car purchase and finance or pay whatever amount is left over. In most cases, you can only trade in your vehicle with car dealerships and sometimes a private buyer.
To determine the trade-in value of your current car, a car dealer will look at:
The Make and Model of Your Vehicle
The make and model of your vehicle will definitely impact how much your car is worth. Some cars, such as luxury brands, tend to retain their value. Newer cars will also be worth more money than older models.
The Condition of the Vehicle
Buyers will look at your car’s exterior and interior to determine how much your vehicle is worth.
The Current Market Value
The current market value is the average amount that a buyer would pay for your vehicle at the moment. Dealers often use guides like Kelley Blue Book to determine the current market value of your car.
The Demand for Your Car
The demand for your vehicle is another factor in how much a car dealer will be willing to pay for it. The more demand, the less time it will sit on their lot, which is a huge incentive for a trade-in. On the other hand, if they already have several models of your vehicle and it hasn’t been doing well for them, they may not be willing to pay top dollar or accept the car for a trade-in!
Alternatives To Trading in a Car?
If you just bought a car and need to sell it because you cannot afford payments, you may want to consider alternatives to a trade-in. Trade-ins add more debt, which you may want to avoid. Here are some options that will free up your money:
Instead of a Trade-in, Sell Your Car Altogether
If you desperately need to pay off your car loan and have another vehicle you can use in the meantime, selling your car altogether can be one option to consider. You will often get more money with an outright sale rather than a trade-in.
Consider Refinancing Your Car Loan
If you have difficulty paying back your car loan, you may consider refinancing it. Refinancing involves taking out a new loan to pay off an existing one. The new loan should be more manageable and, ideally, less expensive in the long run. You don’t have to take out another car loan to refinance with, but you can. Even if you have less than perfect credit, bad credit loan options are available. Keep in mind that refinancing your auto loan can impact your credit scores in a few different ways.
Things You Can Do To Prevent Buyer’s Remorse With a Car
Buying a car is a significant financial decision, and so you should really think things through before going through with a purchase. Careful consideration can help to prevent needing to trade it in immediately, which can save money and time. Here are some things you should consider doing before buying a vehicle:
Take Advantage of Test Drives and Trial Offers
Before you buy a car, you will want to ensure that it is 100% the one you want. And so, you will want to spend some time test-driving it. Some dealerships and car companies will let their buyers even have a trial period where they can take the car home and drive it for a few days. Definitely, take advantage of this, as the last thing you want to do is regret your purchase if you had the opportunity to try things out beforehand.
Do Throughout Research on the Vehicle So You Know It Is a Right Fit for Your Needs
You may be looking for a new car as your primary mode of transportation, you may need a truck for work, or you may be looking for a larger vehicle for your growing family. No matter the reason, you should thoroughly research whether the car you are considering is the right fit for those needs. With adequate research, you can confidently leave a car purchase knowing that the vehicle is right for you.
Make Sure You Can Afford a Loan if You Are Financing Your Vehicle
If you are using a car loan or any other type of financing, it is essential that you know whether you will be able to afford the loan. Before signing a loan contract, you can calculate your monthly payment with an Amortized loan calculator (use this one for car loans). This will give you a close estimate of what you will be paying each month. Only move forward with financing if the loan fits your budget comfortably.
The Bottom Line With Trading in a Car You Just Bought
You can trade in a car right after you buy it, but you should be asking yourself how much equity you have, regardless if it is a financed car or a car you purchased outright. Positive equity will be the right time to trade in your vehicle if you can wait. If you need to trade your car in with negative equity, there are options to lessen the financial damage.
