Should You Let the Dealer Pay Off Your Old Car Loan?

by Miranda Marquit · 8 comments

Car salesman

One of the many gimmicks car dealers use is the promise of paying off your old car loan. If you trade in your car, the dealer agrees to pay off the loan on the vehicle. You end up with a new car, and you don’t have to worry about making payments on both the old and the new loan.

This may seem like a good deal at first, but there are some things that you need to be aware of:

You Might Still Have to Pay the Loan

Yes, the dealer might make payments to your old lender and discharge the loan. However, it’s important to realize that, in many cases, the amount of the old loan is added to your new loan. Even though the lender pays off the old loan, you’re still responsible for paying them what you owe. It’s more like a balance transfer than actually having the loan paid off on your behalf, so don’t be fooled. Pay attention to the terms of the agreement, and be careful what you sign up for.

Make Sure You Get Credit for the Trade-In

Sometimes, in the shuffle of the paperwork, you might not get the value for your trade-in that you deserve. The dealer might just use the trade-in to help you offset the cost of the new purchase you’re making, telling you what a wonderful price you’re getting on the new vehicle by reducing its cost. But you’ll still have to account for the transfer of your old loan on top of your new loan. Understand what value you’re getting for your trade-in, and pay attention to how it’ll be credited to you. Make sure that the transaction is completed in the way that best benefits you.

David’s Note: It’s easy to overpay when transactions become complicated. That’s why it’s always better to negotiate a trade-in value for your vehicle without combining the purchase price of the new vehicle. Run away anytime the salesman tries to tell you it’s easier for both parties if you lump the two deals together. They know it’s easier to get more money out of you by doing so. Get a value for your trade-in, then negotiate again on the new car purchase.

Consider Paying Off the Loan on Your Own

There are some exceptional dealerships that will accept your trade-in and truly pay off your old loan balance. But, in general, you’re probably better off just paying off the old loan on your own before you decide to get a new car. Seldom will you be in a better position by asking the dealer to roll over your old loan, as most dealers are charging you a fee for this convenience.

Instead of adding to your debt load, keep driving your car until it’s paid off.  If the amount you can get covers the balance on your loan, another option is to sell your old car. This way, at least you’re getting a new car without existing car debt!

Have you ever traded in your car even though you still owe money on it? Do you regret the decision, or would you do it again?

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{ 8 comments… read them below or add one }

Stephanie November 13, 2012 at 5:49 am

We fell for this on our last car purchase. WORST. DECISION . EVER!! Don’t do it! Just live with your car till you pay it off yourself.

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Ben November 13, 2012 at 6:17 am

This is an interesting article. I recently went through this, and honestly believe I came out better.

Almost two years ago I bought a Tacoma, V6, offroad package – pretty much the works. It was a nice truck. I drove it off the lot with a $22,xxx loan. It came down to roughly $380/mo for 5 years (ouch!). This last September, between gas, and realizing that I did not want 3+ more years of car payments, I opted to ditch the truck for a sedan that would get better gas mileage and (ideally) have no payments. I still owed about $13,xxx on the truck. I picked out the car I wanted (ended up with an 09 Altima) that was priced at about $15k. Did the test drive, liked it, then the fun part – salesmen. After spending some 4 hours in the dealership going back and forth with the sales manager, we came to an agreement. I traded in the truck (and its loan) + about $2500 and walked away with a 4 year old car with 52k miles on it. This car will last me at least 10 years. My decision came down to freeing up cash flow and taking advantage of high trade in value on my truck. Do I doubt the dealer made money on me? No, I bet he did – but I think I came out pretty well, and I am free of a $380 car payment and Im saving around $100/mo in gas (1500miles per month, the truck got 20mpg on a good day, the altima gets 30mpg without trying).

So in short – in the near term, my net worth probably decreased a bit…. but in the long term, the lower operating costs of the new car more than justified my decision.

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jrasero23 May 5, 2014 at 10:06 am

In your case yes this was a good option since you downsized and pretty much refinanced. Also you properly drastically shortened your loan in years (hopefully) and monthly payment.

The bigger picture thing is buying no more than what you need. I don’t know your personal situation so I can’t say if you actually needed a pickup or not but this is common for someone to go to a dealer to buy a sedan for commuting or whatever but come away with a $40K SUV. Dealers make it really enticing to buy new and usually can get you the price you need to be at each month but put you in a loan for 5-7 years. This is a problem for two reasons, the $40k is still more than you wanted, needed, or can afford in the long run and a 5-7 year loan is usually way too long. Yes some people keep their cars for more than 5-7 years and run them to the ground. My two cents is that don’t buy a car that you can’t afford to payoff in 36 months or less. That doesn’t mean the loan has to be for 36 or less months it just means your ability to payoff in full by 36 months.

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Kevin @ Credit Bureau Insider November 13, 2012 at 8:54 am

Many dealers (and buyers) prefer to fold the old loan into a new one for one simple reason: people often owe more on the loan than the car is worth in trade.

Most car owners are underwater on their car loan the moment they drive it out of the showroom. People borrow against the retail value, and get the wholesale value when trading in.

By rolling the old loan into the new, both the dealer and buyer don’t have to face this reality. The dealer doesn’t want people to know the true costs, and many buyers just want a shiny new car and prefer not to face reality.

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MoneyNing November 13, 2012 at 2:20 pm

The point about facing reality is an interesting one. So many people don’t even want to know how much they are losing out on every day decisions. If people are just honest with themselves, they can likely reduce their spending.

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Bert November 15, 2012 at 1:28 pm

Kevin is absolutely correct in stating a new car buyer is underwater immediately upon leaving the lot. Your dream auto’s value decreases at least 33% at this juncture. Mixing a trade in, with or without an existing loan, only obscures the overall value of the deal. The only way to be perfectly sure you are receiving the best buy at a dealership, is to go straight for the vehicle, by itself. If you are unable to pay cash, then pre-arrange a loan with your bank, or even better, with your credit union. Know in advance how much you will be able to spend. If you still owe on your present clunker, go to the lender for a payout amount. My own credit union offers their repos for sale periodically. They will add an unwanted unit any member has to their list, upon request, and only keep the balance of the loan for themselves. This efficiently puts motivated buyers and sellers together. Although Ben is happy with his deal, he would have fared far better going a similar route.

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jrasero23 May 5, 2014 at 9:50 am

Just traded in my car that I still owed money on. At first I was really hesitant to do this because I read multiple articles about the troubles people run into when trading in a car that still has money owed. My best advice is wait until the loan is fully paid off or only trade in if you have positive equity, meaning the car is worth more than the loan payoff amount. Having positive equity doesn’t mean the dealer mean they will payoff the loan right away but eliminates the trouble of the dealer rolling in negative equity into your new loan.

If you decide to trade in your vehicle and want the dealer to payoff the loan this is a common thing for dealers, BUT make sure to do your homework on what dealer you pick. Even though it is in the dealers best interest to payoff the existing car loan asap in order to legally hold the title to the car in order to sell, some dealers choice not to. One reason being is money, since some dealers don’t have the cash flow. With this said try to go to a prosperous dealer, so no Suzuki or some dealer run out of a trailer. Try to pick a dealer that has BBB Accreditation status and has excellent reviews from customers. Once you find a dealer and agree to the car price and your trade in make sure to give the dealer the proper payoff loan amount and demand it be paid no later than 10 days. Don’t get tricked into 30 day payoff quotes. Simply ask for them to agree to paying off the loan within 10 days. If they can’t, this is a good sign cash might be tight. Also try to complete this transaction at the beginning of the month or after you make your monthly car payment because if the dealer doesn’t pay your loan off right away at least you will have sometime to work with the dealer and not have to pay two loans at once.

Also remember once you sign, that doesn’t mean your work at been done. Make sure to constantly hound the dealer about the payoff. As for them to overnight the payment to your lender and send you a scanned copy of the check and the tracking number. Then followup with your bank to make sure they received the payment and request for transfer of title and make sure you don’t have any outstanding balances and that your account gets properly closed.

Again, the best option is to payoff the loan in full so you have less work and debt in the long run but if you need a car for whatever reason try to have positive equity in the trade in and follow these steps

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David June 25, 2014 at 11:05 am

I have a trade in that I’m contemplating. I have a 2013 Mazda we bought brand new and needed a loan to purchase. We still owe around $13,000 and kbb.com has a trade-in value of $16,000-17,000 on it, so based on that source it’s a relief we have positive equity. But our family is growing so our needs are changing and would like to get a mini-van (sigh). Thinking about a used Honda Odyssey in the $10-15,000 range. So, trading in our current vehicle for one that is actually worth less money. It’s an upgrade in utility, but a downgrade in terms of getting an older, cheaper vehicle to replace our newer one. We also would like to shed the monthly loan payment. Is there potential to trade in our Mazda for a mini-van and transfer the loan to the dealer? I haven’t seen anywhere on the internet about this kind of scenario. The one by Ben in these comments is similar, except his truck he traded in was worth less money than the sedan he got. Ours would be trading in a car that’s worth more than the van we want. Any thoughts? Thanks

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