You’ve got your eyes on a shiny new all-wheel-wheel-drive crossover but you still owe thousands on your five-year-old sedan.

Dozens of questions race through your mind. Can you purchase a new vehicle if you owe big bucks on your old sedan? What happens to the loan on your trade-in? How complicated is it to pay off? Does the vehicle’s title have to be brought to the dealership when shopping for a new car and negotiating the deal?

Well, it’s easier than you can image to buy a new vehicle. New car and truck dealers deal with this customer scenario every day.

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Loan balances no surprise

Simply, you are not going to surprise the salesman when you mention that thousands are owed on your car or truck. That sales person deals with customers everyday who owe thousands maybe even tens of thousands on their car or truck when they get the bug to purchase a new model.

Fortunately, it is not necessary to go through the frustrating ordeal of trying to figure out how to pay off your car loan and then waiting weeks for the title to materialize from your state’s division of motors vehicles before shopping and purchasing a new vehicle.

Instead, what happens is that after you inform the dealer that money is owed on the trade-in, he will contact the bank or financial institution that holds the note on your trade-in to determine how much is owed by you. Next, the trade-in value of your sedan is determined as well as the final price for the new vehicle including the term for the new loan, monthly payment, taxes, etc. The dealer contacts your financial institution to pay off the loan that was on the trade-in, your old car.

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Let the dealer do the legwork

Regarding your old car, the dealer does all the legwork. Generally speaking, it usually is not necessary for you to contact your financial institution to tell them you plan to sell your car or truck and purchase a new model.

Once the dealer pays off the loan on your car, the dealership receives the car’s title. The dealership either places the car or truck on its used vehicle lot or sends the vehicle to a wholesale vehicle auction where it is sold to another dealer. For peace of mind, it is a good idea after the new vehicle has been in your hands for two weeks or so to double check with the financial institution that provided the loan to you for your old car, making sure the dealer paid off that loan.

Finally, a car buyer likely will be “underwater” when the new car or truck is purchased under this scenario. This is a financial term that means the car owner owes more money on the vehicle than the vehicle is worth. The dealer rolls the negative equity into the purchase price.  

For example, if you still owe $12,000 on the loan but the car’s value is $9,000, the dealer will add $3,000 into the vehicle’s purchase price of the car you are buying. You end up paying it off as you pay off your new car. However, the best practice is to avoid rolling that negative equity into your new purchase—you should try to find a way to pay off that balance or as much of it as possible to protect your stake in your new car.


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