Should You Pay Off Your Car Before Trading It In?

Nov 8, 2019, 16:04 PM
Should You Pay Off Your Car Before Trading It In?

Buying a car on finance/with a car loan is a great decision for many people, as it allows them to drive the car they really want, without hurting their cash flow. In fact, for many people, this will be the only way to afford the kind of vehicle that they always imagined driving.


But it does create some more complicated questions that you might not have had to consider otherwise. For example: should you pay off your car before trading it in? Let’s find out.


Should You Pay Off Your Car Before Trading It In?


Cars Are Depreciating Assets


The first thing to keep in mind is that a car is what is known as a depreciating asset. That means that unlike property, or cash in the bank, your car’s overall value gets lower the longer you keep hold of it. Meanwhile, the cost of your loan will go up as it accrues interest over time.


That means that in some cases, you will owe more on the loan than the car is worth! This is increasingly likely as you get closer to paying your car loan off. And as you reach the point where you’re looking to trade in, chances are that you’ll be getting there.


This is what we call negative equity. It’s a really bad thing in property, but it’s fairly common with a car!


Negative Equity


Now here’s the problem: if you trade in your car and you still have negative equity, you will have lost the collateral that you used to secure the loan. This means that you will immediately owe the full amount of the loan which will be more than the amount you get for the car!


Whether or not this is a problem depends on whether you can pay off the rest of the loan. That remaining amount is going to get added to the amount of the loan for the new vehicle, which means you’ll either have a longer loan, or the payments will be larger.


Conversely, if you waited until the loan was paid off, then you would be able to trade the car in and then start afresh. So, in many cases, waiting that little bit longer until you’ve paid everything off actually makes more sense.

OR you might just want to settle the loan, then trade.


There Are Other Considerations


But there are other considerations to be made. For example, what if the car you have in your possession is a huge gas guzzler? If that’s the case, then you’re going to be spending more money by keeping the car longer.


Likewise, the car might have more tax to pay, or it might require more repairs. Conversely, the new vehicle might come with a deal that helps you when you trade in.


That means that ultimately, this is going to be a decision that depends on the precise circumstances. Think about all the angles, and write up a spreadsheet. But at the same time, also ask yourself how much enjoyment you’d get out of having that new car now. That’s not nothing!


Metro Credit Union | Best Car Rates in Omaha


Our goal is to help you get the best deal possible, whether you finance with us or not! We'll use our resources to determine if you're paying a fair price for a new or used vehicle, whether you're getting the maximum out of your trade, and determine if your loan rate is competitive.


All of this at no charge, with no sales pressure. It just makes sense to start your car buying experience with someone you trust, your credit union!


Plus, we offer great deals on extended warranties & GAP insurance.

Learn about things to consider when buying a used or new car.

Metro Credit Union- Your Local Advantage ®