Should You Pay off Your Auto Loan Before Trading in Your Car?

Each year, millions of people trade in their current vehicles to help them purchase new cars. However, depending on your financial situation, you may be better off paying off your auto loan before trading your car in. Here are a few important things to keep in mind as you make your decision.

Factors to Consider Before Trading in Your Vehicle

Whether You Have Any Equity in Your Vehicle

A car is a depreciating asset; this means over time, the value of your car will decrease. The most depreciation usually occurs in the first couple of years of a new vehicle's life. After this, the depreciation slows down and continues to slow as the vehicle gets older.

Depending on the terms of your auto loan and how long you've had the vehicle, you may currently owe more than the vehicle is worth. This is known as being "upside down" or having "negative equity."

If you have negative equity, you'll need to roll the amount you owe into your new auto loan. The disadvantage of doing this is it puts you upside on your new vehicle as well. For example, if your current auto loan has a $2,000 balance and you're buying a new vehicle for $20,000, your new auto loan will need to be for $22,000 in order to cover the amount you owe on your old vehicle. You'll automatically be at least $2,000 "upside down" on your new car, not accounting for first-year depreciation.

The Advantages of a Different Vehicle

Sometimes, it makes sense to roll your old auto loan into your new loan due to the advantages of immediately purchasing a different car. For example, if you commute to work and currently drive a vehicle with poor gas mileage, you can easily save hundreds of dollars each month by swapping your car for one with better mpg.

The benefits of another vehicle may be less tangible. If your family is growing and you need more space to accommodate children or multiple car seats, then the convenience of a new vehicle likely outweighs a larger auto loan.

Your Credit History

If you have good credit, you can likely procure a favorable interest rate on your auto loan, even if you have to roll your old loan balance into the loan. This makes it affordable for you to get into a vehicle that better suits your needs. A few extra thousand dollars spread out over three to five years will only add a small amount to your auto loan's monthly payment.

Find an Ideal Auto Loan at CCCU

Clark County Credit Union offers auto loans with lower rates and better payment options. Contact us at 702-228-2228 to learn about the auto loan options available to you through CCCU.