Why You Should Never Trade in a Car if You Owe Money on It


If you’re thinking about buying a new vehicle, you should know that the only way it’s really going to pay off in the long run is if you maintain it over the years.

But money expert Clark Howard says to a large degree the opposite is happening: Many car owners are being enticed to upgrade their vehicles before they’ve even paid off their car loans — and that’s a bad idea!

Thinking of Trading in a Car That Isn’t Paid Off? Read This

The scenario for a car owner usually goes something like this: “You’ve gotten tired of the vehicle and you want something else, so you trade it in,” Clark says in a recent podcast.

But when a car owner brings a vehicle they’re still paying on to a dealer, they’re taking some mighty big risks, Clark says.

Big Risk #1

“You’re trusting that the dealer you’re trading the vehicle in to, ” Clark says, “is going to pay off the loan on that trade-in.”

The truth is that the dealer has no legal obligation to do that and here’s why: “You signed the note originally for the vehicle you traded in,” Clark says.

Some bad things can happen because of this unwise money move, including:

  • The vehicle could end up being repossessed, which could wreck your credit and ultimately lead to a court judgment against you in many states
  • Once you lose the vehicle, you’ll still have to pay for it — you’re now without a car or the cash

Big Risk #2

You let the dealer roll your outstanding balance for your old car into the loan for a new one, saddling you with a ginormous car note to worry about.

“What happens is such an unbelievable disaster that it may take you years and years to recover,” Clark says.

If you do agree to a new loan that absorbs the old one, more bad things could happen. You could still find yourself in a situation where the dealer may be strapped for cash and not pay off your trade-in.


The lender could then take legal action to go after who’s legally responsible: YOU.

“You’re the one on the hook for the payment of that vehicle,” Clark says.

Because of those equally bad outcomes, Clark has a “never rule” when it comes to this type of situation:

“Never, never, never trade in a vehicle you still owe money on. Period. Problem solved,” Clark says.

He adds: “If you trade in a vehicle that you own free and clear, this disaster cannot happen to you.”

Bottom Line

So, the moral of this story is to resist the urge to jump into the latest and greatest just because your vehicle is getting a little long in the tooth.

“You solve so many problems that could happen in your life if you don’t get tempted to get rid of a vehicle that you still owe money on — especially if you’re upside down,” Clark says.

It may be a hard pill to swallow, but here’s Clark’s parting advice: “Take the bitter medicine and keep driving the thing even if you don’t like it anymore.”

Want to read more tips like these? Here’s Clark’s guide to buying a new car.

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