Car Deal Canada

Trading-In a Financed Car

Training in a Financed Car

Trading in a car you still owe money on may seem daunting, but it’s a common scenario for many drivers. In fact, according to Experian, the average auto loan debt in Canada is over $20,000! With new car prices at record highs, trading in your current financed vehicle can help lower your monthly payments on that shiny new ride.

But before you head to the dealership, there’s a few important things you need to understand about the process. By learning how equity, payoff amounts, and dealer incentives work, you can make the best financial decision for your situation. This comprehensive guide will walk you through all the key steps so you can trade in your financed car with confidence.

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What Does Trading In a Financed Car Mean?

Trading in a financed car means exchanging your current vehicle that you still owe money on towards the purchase of a new car. When you originally bought your car, you likely took out an auto loan from a bank or financing provided by the dealership. This loan had a set repayment term, usually 3-6 years. If you trade in the car before paying off the loan completely, your trade-in is considered a financed vehicle.

For example, if you bought a 2019 Honda Civic 3 years ago with a 5 year loan, you likely still have 2 years of payments left. If you trade that Civic in today for a new 2022 Civic, it is a financed trade-in because you haven’t fully paid off the loan yet. The dealership will need to pay off your remaining loan balance as part of the trade-in process.

A financed trade-in is different from trading in a vehicle you fully own, where there is no outstanding loan balance. With a financed trade-in, the payoff amount must be handled as part of the overall deal when you are purchasing your new vehicle. This introduces additional factors to consider during the negotiations compared to an owned trade-in with no remaining payments.


Is It Allowed to Trade In a Financed Car?

One of the most common questions that comes up when discussing trading in a financed vehicle is whether it’s even allowed in the first place. Many car buyers mistakenly believe that trading in a car you still owe money on must be against the law or prohibited by financing companies.

The good news is this is absolutely not true – there are no legal restrictions or rules preventing you from trading in a financed car to a dealership. Auto manufacturers, banks, credit unions, and dealers all readily accept trade-ins of vehicles that have outstanding loan balances. It is a very common practice in the automotive industry.

In fact, dealerships actually encourage trading in financed vehicles as it gives them an opportunity to get you into a new car loan and sell you another vehicle. They have processes in place to pay off your existing loan balance and roll it into the financing of your next vehicle purchase.

The bottom line is that trading in a car with an existing loan is perfectly acceptable and actively supported by dealerships across Canada. There is no need to wait until you have completely paid off your current car before considering a trade-in for a new one.


Steps to Take Before Trading In

If you’ve decided you want to trade in your financed vehicle, there are some important steps to take before visiting the dealership. This will ensure you have all the necessary information and are prepared to negotiate the best possible deal.


Determine Payoff Amount

The first thing you’ll need is the payoff amount for your existing auto loan. This is the full amount still owed on the loan. Contact your lender to get the exact payoff figure, including any interest accrued since your last payment.

Having the payoff amount gives you a clear picture of how much is still owed, allowing you to accurately calculate equity and determine the trade-in value you’ll need.


Calculate Equity

Next, find out the current market value of your vehicle if you were to sell it. Use car valuation tools like Kelley Blue Book to see what your vehicle would be worth as a trade-in at a dealership.

Compare the trade-in value with your remaining payoff amount. If your payoff is lower, you have positive equity in the vehicle. If the payoff is higher, you have negative equity.

Knowing your equity position will impact the trade-in process and whether you need to pay extra on your loan balance before trading in.


Explore Refinancing

One option to consider before trading in is refinancing your existing auto loan. This allows you to potentially lower the payoff amount by securing a lower interest rate.

Run the numbers to see if refinancing makes sense based on your credit, loan term, and interest rate differences. A lower payoff amount means less negative equity to handle at trade-in.

Going through these steps will properly prepare you before visiting the dealership to trade in your financed vehicle.


Understanding Positive vs Negative Equity

When trading in a financed vehicle, it’s important to understand the concepts of positive equity and negative equity. This refers to the difference between what you currently owe on your loan balance and what the trade-in value of your car is.

Positive equity means your vehicle is worth more as a trade-in than you currently owe on the loan. For example, if you owe $15,000 on your loan but your car’s trade-in value is $18,000, you have $3,000 in positive equity. This equity can be applied towards the purchase of your new vehicle to lower the amount you need to finance.

Negative equity means you owe more on your current loan than your car’s trade-in value. For instance, if you owe $15,000 but your car’s trade-in value is only $12,000, you have $3,000 in negative equity. This amount would need to be paid off first or rolled into the financing of the new vehicle’s purchase.

Understanding whether you have positive or negative equity, and by how much, will help you determine the best approach when trading in your financed vehicle. A dealership can appraise your trade-in to give you an accurate picture of where you stand in terms of equity prior to starting the trade-in process.


How the Trade-In Process Works

Trading in a financed vehicle at the dealership involves a straightforward sequence of steps once you’ve selected your new car. Here’s an overview of how it typically goes:


  1. Finalize the details of your new car purchase or lease – negotiate the price, add-ons, etc. This part comes first, before bringing up the trade-in.


  1. Inform the salesperson you have a financed vehicle to trade-in. Provide details on the year, make, model, mileage etc.


  1. The dealership will appraise your trade-in and make you an offer. This is based on the current market value, taking into account mileage and condition.


  1. Compare the trade-in offer to your remaining loan balance. This determines if you have positive or negative equity.


  1. If you have positive equity, the extra can be applied towards your new purchase as a down payment.


  1. If you have negative equity, you’ll need to pay the difference to satisfy the loan. This gets rolled into the financing for your new vehicle.


  1. The dealer handles paying off your existing loan and transferring the title once the deal is complete.


  1. All paperwork for the trade-in and new purchase financing goes to the respective lenders to finalize everything behind the scenes.


  1. In most cases, you can drive home in your new car the same day when trading in a financed vehicle!


Tips for Maximizing Your Trade-In Value

When trading in a financed vehicle, getting the highest possible trade-in value can make the process much smoother. Here are some tips to maximize your trade-in value and get the most money possible:


  • Pay down your loan balance – The lower your remaining loan balance, the higher your equity will be in the trade-in. Make extra payments to owe less when you go to trade it in.
  • Keep up with maintenance – A car in good mechanical shape with complete service records will be worth more. Keep up with factory recommended maintenance.
  • Clean it thoroughly – A spotless, detailed car shows pride of ownership and commands better value. Clean the exterior, shampoo interior carpets, etc.
  • Make minor repairs – Fix minor dents, scratches, windshield chips, burned out lights to make it more appealing.
  • Get multiple appraisals – Appraise the car at multiple dealers to understand its full market value. Negotiate from the highest appraisal.
  • Time it right – Trade-in values peak when new model years arrive, as dealers want to move old inventory. Trade yours in just before new models hit.
  • Understand incentives – Manufacturers sometimes offer enhanced trade-in bonuses. Time it to maximize these special incentives.
  • Negotiate as a package – Negotiate the trade-in as part of the overall deal, not separately. There are often better incentives.
  • Research trade-in tips – There are many more great tips online to maximize your trade-in value. Do your research to benefit.


With the right preparation and negotiation strategy, you can get thousands more for your trade-in. Do your homework to get the most money possible when trading in your financed vehicle.


Special Dealer Incentives

When trading in a financed vehicle, it’s important to be aware of any special incentives or promotions being offered by dealerships that could help lower your costs. Many dealers will run periodic promotions that can provide significant savings if you time your trade-in right.

For example, dealers may offer bonus trade-in value during certain sales events, allowing you to get more money for your current vehicle. This extra trade-in value can help offset negative equity, lower your new loan amount, or reduce your cash down payment.

Manufacturers also sponsor promotions that dealerships participate in, such as “Keep Your Payment the Same” programs when you trade up to a new model. The finance manager can structure the deal to match your old monthly payment, absorbing any negative equity from your trade-in. This allows an easy transition without increasing your budget.

It’s a good idea to check a dealer’s website, social media, or visit in person to ask about any trade-in incentives currently being offered. Knowing what promotions are available can put you in a stronger negotiating position with the finance manager to maximize savings.

You may also want to time your trade-in to take advantage of peak demand seasons, like during major holiday sales events. Dealers are more motivated to discount pricing and offer incentives during busy sales periods. Trading in your financed vehicle during these promotional times can result in the finance manager being more flexible to get the deal done.

With the right timing and preparation, special dealer incentives create opportunities to negotiate the most value for your trade-in. Check for promotions, understand the finance manager’s motivations, and leverage these savings for the optimal deal when trading in your financed car.


Trading In Leased Vehicles

Trading in a leased vehicle involves a few extra steps compared to a financed purchase. Here’s what you need to know:


Determine Payoff Amount

Calculate the payoff amount to cover the remaining lease payments and purchase option price at the end of your term. This is the amount you’ll need to pay off to trade in the leased vehicle.


Check for Disposition Fee

Most leases have a disposition fee you pay at turn-in. This covers the lease company’s costs to take the car back and get it ready for resale. Verify the amount so you can factor it in.


Consider Excess Wear and Mileage

Assess if you’ll owe for excess wear and tear or going over the mileage limit. This will increase your payoff amount. Thoroughly cleaning and repairing any damage can help minimize fees.


Trade Equity Towards New Lease

If you have positive equity in the leased vehicle, that can be applied as a down payment on the new lease to lower your payments. Make sure the dealer applies any equity you have to maximize savings.


Transfer Accessories and Upgrades

Check your lease contract regarding aftermarket parts you installed. You may be able to transfer them to the new vehicle if permitted by the lease company.

With some preparation and research, trading in your leased vehicle can be a smooth process. Evaluate your payoff amount, fees, equity position and contract terms to make the best deal.


Trading Up vs Trading Down

When trading in a financed vehicle, you have the option to get a more expensive new car (trading up) or a less expensive one (trading down). Both options have advantages and disadvantages to weigh.


Trading Up Pros and Cons

Trading your financed car for a more expensive new one has some potential benefits:


  • You can get a nicer, more luxurious vehicle with more features
  • Newer model years often have the latest technology and safety advancements
  • Higher resale value down the road if well maintained


However, there are also some drawbacks to consider with trading up:


  • Higher monthly payments on the new auto loan
  • Potentially higher interest rates on pricier vehicles
  • Higher sales tax bill based on new car’s value
  • Increased auto insurance premiums


Trading Down Pros and Cons

On the other hand, trading your financed vehicle for a less expensive model can have these advantages:


  • Lower monthly payments fit better within budget
  • Easier to qualify for financing terms
  • Less sales tax owed
  • Potential for lower insurance rates


Some possible cons of trading down include:


  • Fewer features and less luxury
  • Older model year vehicle
  • Lower resale value in the future
  • Less flexibility to add upgrades later


Carefully weighing the pros and cons of both directions will help you make the best choice when trading in your financed car.


Alternatives to Trading In

While trading in your financed vehicle at the dealership is the most convenient option, it’s not the only one. Here are a few other alternatives to consider:


Selling Privately

You can sell your financed car yourself rather than trading it in. This takes more time and effort, but typically results in getting more money for your car. With private sales, you negotiate directly with buyers and can often get thousands more than the dealer’s trade-in offer.

To sell privately, you’ll need to pay off your existing auto loan first, obtain the title, advertise the car, show it to prospective buyers, and handle all paperwork. 


Transferring the Lease

If your current vehicle is leased, you may have the option to transfer the lease to another person rather than trading it in. This avoids lease-end fees and dispositions charges.

The new lessee takes over your payment obligations and you’re released from the lease contract. Check your lease terms for any restrictions or fees related to transfers.


Paying Off Loan First

You can simply finish paying your existing auto loan first before getting a new vehicle. This allows you to own the car free and clear. You can then sell or trade it in without any financing complications.

While this takes discipline, it maximizes your trade-in or sale value without rolling debt into a new loan. Paying down the loan also builds equity which gives you more options.


Tax Implications of Trading In a Financed Car

Trading in a financed vehicle can have tax implications that are important to consider. There are two main taxes that may come into play – sales tax and income tax.


Sales Tax

When you purchase a new vehicle, you typically have to pay sales tax on the full purchase price. However, with a trade-in, you only pay sales tax on the difference between the new vehicle price and your trade-in value. This can result in significant sales tax savings compared to purchasing a new car without a trade-in.

For example, if you purchase a $30,000 vehicle and trade in a car worth $15,000, you would only pay sales tax on the $15,000 difference instead of the full $30,000 purchase price. The exact sales tax savings will depend on the tax rate in your state/province.


Income Tax

Trading in a financed vehicle may also impact your income taxes. If you receive a trade-in value that is less than what you still owe on the loan, the difference is counted as taxable income.

For instance, if you owe $12,000 on your trade-in loan but the vehicle is only valued at $10,000, that $2,000 difference is considered taxable income. You may receive a 1099-C cancellation of debt form from your lender for the amount forgiven.

However, if you have positive equity in your trade-in, you typically do not have to report any taxable income from the transaction.

Consult with a tax professional to understand the potential income tax implications when trading in a financed vehicle.


Impact on Insurance

Trading in your financed vehicle can also impact your auto insurance coverage. Here are some key things to know:

Notifying Your Insurer: As soon as you finalize the trade-in, be sure to contact your insurance company to notify them. You will need to cancel coverage on your old traded-in vehicle and get coverage set up for your new vehicle.

Getting Coverage for the New Car: Most insurers will allow you to easily transfer your policy to the new vehicle. This ensures you have continuous coverage during the transition. Be prepared to provide details about the new car like the VIN, year/make/model, etc.

Impact on Premiums: Your premiums may go up or down when you insure a new vehicle, depending on the specific car. Sports cars, for example, often cost more to insure than family sedans. Your driving record, location, and other factors also determine your rates.

Gaps in Coverage: Avoid any gaps in coverage during the trade-in transition, otherwise you could risk driving uninsured. Make sure your old car is covered until the moment you sign the paperwork, then have the new policy take effect immediately.

Cancellation Fees: Check your current policy to see if you’ll incur any cancellation fees for ending your coverage mid-term. This varies by insurer.

Comparing Rates: Take the opportunity to compare quotes from multiple insurers when you’re insuring a new car. You may be able to find cheaper rates than your current provider offers.



Trading in a financed vehicle can be a great way to get into a newer car while also getting value for your current vehicle. However, it’s important to understand the full process and implications before visiting the dealership.

The key steps include determining your payoff amount, calculating your vehicle’s trade-in value to determine equity, exploring refinancing options, and negotiating well at the dealership. It’s also crucial to understand the difference between positive and negative equity situations.

With proper preparation and knowledge, trading in a financed car can allow you to transition to a new vehicle that better suits your needs and budget. Just be sure to do your homework ahead of time. The dealership’s finance team is there to help guide you through the process as well.

For readers interested in trading in their financed vehicle, the next step is to assess your exact loan balance, projected trade-in value, and new vehicle needs. Stop by your local dealership when you’re ready to explore your options. With the right approach, you can leverage your financed car into a great new ride.


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Questions About Training in a Financed Car

Yes, you can trade in a financed car in Canada. However, you will still be responsible for paying off the remaining loan balance on the financed vehicle. The value of your trade-in will be applied as a down payment on the new vehicle you are purchasing or leasing. If you owe more than the trade-in value, that amount is called negative equity, which you must pay off before finalizing the new vehicle purchase. Dealers can often roll the negative equity into the new loan or lease, but this increases your payments.

When trading in a financed car in Canada, the process works like this:


  1. Get an appraisal on your current vehicle to determine the trade-in value
  2. Calculate how much you still owe on the existing auto loan
  3. Subtract the trade-in value from your loan balance to determine if there is negative equity
  4. Discuss options for rolling negative equity into a new loan with the dealership if applicable
  5. Finalize the new vehicle purchase or lease with the trade-in value applied


The key things to know are that you are still responsible for the remaining loan balance and must satisfy that obligation to trade in the financed vehicle.

Yes, you can still trade in your car in Canada even if you owe more than it’s current value, which is called being “upside down” on a loan. The options in this situation are:


  1. Pay the difference in cash to satisfy the loan
  2. Roll the outstanding “negative equity” balance into a new auto loan
  3. Lease a new vehicle, which may allow rolling in more negative equity than financing
  4. Negotiate with the original lender to reduce the loan balance prior to trade-in


While being upside down on your loan makes trading in more complicated, dealerships can often find creative solutions to get you into a new vehicle. Discuss all options thoroughly during the negotiation.

There are pros and cons to trading in a financed vehicle in Canada:



– Can leverage equity towards new vehicle purchase

– Convenient to bundle transactions

– Avoid selling privately and cash shortfalls



– Negative equity can increase new loan payments

– Interest savings incentives on new loan may not outweigh existing rate

– Can be complex transaction with loan payoffs


In general if you have positive equity, are getting a good trade-in value, and negotiated well on the new vehicle, trading in your financed car in Canada can be a smooth process and net you significant savings.

When trading in a financed vehicle in Canada, make sure you have the following paperwork handy to expedite the process:


– Current registration for your financed vehicle

– Most recent loan statement showing payoff balance

– Completed transfer/bill of sale form

– Signed title if you have the vehicle title

– Insurance information for your financed vehicle

– Keys, fobs and other accessories from financed vehicle


Having these items ready demonstrates proof of ownership, verifies the payoff amount, and allows the dealer to take possession of the trade-in. Review all forms carefully before signing documents to trade in your financed car.

Trading in a financed vehicle in Canada typically adds 1-3 days to the normal purchase process for a new vehicle. The extra steps of coordinating payoff of the existing loan and transferring title temporarily delay completing the new sale. Most dealers try to make the process as quick and seamless as possible. If you provide all required paperwork upfront and are well prepared, trading in a financed car in Canada can often be finalized within the same day.

Whether your monthly payments decrease when trading in a financed car in Canada depends on several factors:


  1. The selling price and interest rate on the new vehicle
  2. How much negative or positive equity you have
  3. If the new loan term is shorter than the existing term
  4. If applicable, differences in lease payment calculations


Crunching the numbers is imperative – a more expensive new vehicle could offset equity gain. Leasing may produce lower payments but you don’t build long term equity. Perform an apples-to-apples comparison of the complete new deal to determine the true payment impact.

Yes, you can trade in a leased vehicle in Canada. The steps are mostly the same as trading in a financed car. Your buyout quote from the leasing company replaces the loan payoff amount. Lease turn-ins may or may not generate equity depending on mileage and condition. Excess wear or mileage could result in end-of-lease fees deducted from trade value. Discuss your leased car’s current status to determine actual trade-in value with a dealer.

When trading in a financed vehicle in Canada, you may incur the following fees:


– Payoff processing fee to existing lender (often $300-$500)

– Doc/admin fees on new vehicle purchase (typically $495-$895)

– Taxes on difference between trade value and new vehicle price

– Registration and titling costs for new vehicle


Carefully review all numbers on the purchase agreement before finalizing a deal to trade in your financed car. There should be full disclosure of any fees so surprises don’t arise later.

No, Canada’s tax law does not provide tax breaks specifically for trading in a financed vehicle. However, the Canadian government does offer rebates of $1,000-$5,000 towards select new electric vehicle purchases which lower the taxable selling price. Any sales tax in Canada is based on the net difference between the trade-in value and final negotiated price of the new vehicle. This inherently provides a type of “tax break” on the portion of the new vehicle price attributed to your trade-in.

To maximize trade-in value on your financed car in Canada:


– Maintain service records to demonstrate vehicle care

– Keep mileage lower than average for the vehicle’s age

– Repair any interior or exterior damage prior to appraisal

– Wash/wax and clean inside to improve appearance

– Consider third-party trade brokers to source best offers

– Negotiate trade and purchase separately to increase leverage


Putting extra effort into getting your vehicle looking and running like new for the appraisal process nearly always results in more money offered by the dealer.

Paying off a financed car in Canada only makes strategic sense in certain situations:


  1. You have cash available to pay it off in full
  2. Eliminating debt increases approval odds for new loan
  3. The interest rate is high and paying off saves substantially
  4. Peace of mind not having prior loan hanging over


If paying off a financed trade-in requires taking other loans, it likely won’t provide enough benefit. Payoff decisions require case by case analysis based on equity, rates, and personal financial standing.

The optimal time to trade in a financed vehicle in Canada is when you have 12-24 months left on your loan term. At this point:


– Your car still retains decent value to leverage

– You’ve paid down a large portion of the principal balance

– Loan won’t flip upside down if the car drops in values

– Interest expense is minimized if paying off remainder


Trading in during this “equity sweet spot” makes transitioning to a new vehicle most affordable.

The best places to trade in a financed car in Canada are reputable franchise dealerships affiliated with major manufacturers. Benefits of trading into dealers vs. smaller independent lots include:


– Broader inventory selection and availability

– OEM certification programs adding value assurance

– Higher volume facilitates easier loan payoff processing

– More financing partnerships to bundle negative equity

– Better brand alignment for lease-to-lease transfers


Performing some research before making a trade will lead you to the most favorable dealer for your situation.

Key questions to ask the dealership when trading in your financed car in Canada:


– What is the appraised value you will allow for my trade-in today?

– How much do I currently owe on my loan for the payoff amount?

– Will you be able to fully pay off my current lender directly?

– If I have negative equity, what options exist to roll that into a new loan?

– Are there any special manufacturer incentives available I qualify for?

– Does the incentives offer require a trade-in or can I still use it without one?

– What fees are involved over and above the sales price we agree on?


Asking these questions will give you the information needed to determine the real net financial impact of trading in your current financed vehicle.

Most Canadian dealers will not cut a check for trade-in value in place of putting it towards a new vehicle purchase. However, some dealers may be willing to over-appraise your trade-in value and discount the new vehicle by that amount to create equivalent cash savings. There are also emerging third-party “cash for cars” buyers focused specifically on providing cash for trade-ins outside of dealers. While not as common, explore all options if a cash payoff is your priority in the trade-in process.

Alternatives to trading in a financed vehicle in Canada include:


  1. Selling to a private party
  2. Using third-party selling platforms like Kijiji Autos or AutoTrader
  3. Consigning in a dealer auction
  4. Utilizing online instant trade-in valuation tools
  5. Simply continuing to drive your current vehicle longer term


Each option has pros and cons to weigh based on effort, pricing, timing and hassle factors. Make sure to evaluate all scenarios before automatically opting for the trade-in.

Trading in a financed leased vehicle in Canada necessitates updating your auto insurance policy for the new replacement vehicle. When you purchase or lease the new vehicle, contact your insurer to have them revise the policy. Expect the following:


– Return any unused premium for months left on old policy

– Potential payment increase or decrease based on new car

– Changes to coverage limits or riders

– Requirement to add new vehicle to policy immediately


Keeping insurance and vehicle transactions coordinated is essential. Make insurer awareness of the trade-in a priority or risk driving uninsured.

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