I have a 3 year old car that has a blue book value of around $14k. I owe $7k on the car still w/ 2 years left to repay. I'm thinking about trading it in (need AWD... too much snow in Chicago the last couple of years)...

I have the $7 available to pay the car off before trading it in, but I'm wondering if there is any leverage on either side doing one of the following...

1) Trade in car w/ $7k balance on it, hopefully get $7k credit for car, then apply my $7k in cash towards new car.

2) Pay off car and hopefully get $14 towards down payment of new car.

There may be no difference, but I wondered if anyone knows if one gives you more leverage either in financing or working down the price of a new car.

  • AWD helps less than you'd expect. Remember, all cars havd 4-wheel brakes, and most now have antilock brakes which are a Much Bigger Concern. 4wd/awd really helps mosty in situations where you can't get started from a dead stop. – keshlam Jun 4 '15 at 18:49
  • I have a Kia Soul and the combination of the light weight and tires that suck in snow make is so I can't get into my driveway or out my alley when we get 6+ inches of snow. I've driven around here my whole life in various cars and this one is by far the worst. Also don't have a garage or anywhere to store snow tires to rotate on/off. – Don Jun 4 '15 at 19:50
  • @keshlam AWD has helped me tremendously (I live in a hilly neighborhood that is notoriously icy in the wintertime). With my old front wheel drive car, there were times when I couldn't make it home. With AWD, I've never had a problem despite similar conditions. – Derek_6424246 Jun 4 '15 at 22:29
  • Ok; I grant that stopping and resuming on a steep icy hill is easier with AWD. I've just seen too many folks who seem to think it makes all winter driving problems go away and discover the hard way that it doesn't, by a long shot. If you need it, you need it... but it addresses a very specific set of issues. – keshlam Jun 4 '15 at 23:10

Break the transactions into parts.

  1. Go to your bank or credit union and get a loan commitment. When applying for loan get the maximum amount they will let you borrow assuming that you will no longer own the first car.

  2. Take the car to a dealer and get a written estimate for selling the car. Pick one that gives you an estimate that is good for a week or ten days. You now know a data point for the trade-in value.

  3. Finally go to the dealer where you will buy the replacement car. Negotiate the price, tell them you don't need financing and you will not be trading in the car. Get all you can regarding rebates and other special incentives.

  4. Once you have a solid in writing commitment, then ask about financing and trade in. If they beat the numbers you have regarding interest rate and trade-in value accept those parts of the deal. But don't let them change anything else.

  5. If you keep the bank financing the dealer will usually give you a couple of days to get a check.

  6. If you decide to ell the car to the first dealer do so as soon as you pick up the replacement car.

If you try to start with the dealer you are buying the car from they will keep adjusting the rate, length of loan, trade-in value, and price until you have no idea if you are getting a good deal.

  • A good addition would be to add another paragraph under each point (indent 2 spaces will do it) to explain how each point protects you. (I get part of it (and the order of 3 & 4 is obvious), but I feel like I'm missing half of your genius, as I am inexperienced with both loans and car dealerships.) – jpaugh Nov 11 '16 at 2:49

The best thing to do is pay off the car. Adding more variables to a negotiation with a car dealer (in this case, a trade in), is always going to go in their favor. This is why people recommend negotiating a price down first, before ever mentioning to the dealer you want to do a trade in or financing.

  • More variables at once is in no-one's favor, as both the buyer and seller will have a harder time understanding the value (although a dealer will have the advantage of experience here). But, from mhoran's answer, it looks like adding variables in the best order can be beneficial. – jpaugh Nov 11 '16 at 2:52

Absolutely do not pay off the car if you aren't planning to keep it. The amount of equity that you have from a trade in vehicle will always be a variable when negotiating a new car purchase. By applying cash (a hard asset) to increase your equity, you are trading a fixed amount for an unknown, variable amount. You are also moving from a position of more certainty for a position of less certainty. You gain nothing by paying off the car, whereas the dealer can negotiate away a larger piece of the equity in the vehicle.

  • Is the new car the unknown, or the loan? Either interpretation gives a slightly different meaning here. – jpaugh Nov 11 '16 at 2:57

Option 2.

Selling the car yourself will give you the best value, especially if you can get its full value. This will cost you time, but will return much better return for your money.

Also, I would strongly recommend buying a used car from a private owner (not a dealer), rather than buying a new car. For $14,000 in cash you can probably get a car like a 2013 Ford Fusion that has excellent all-wheel drive and winter handling. A new Fusion, loaded, will cost at least $25,000 from a dealer. If you buy a 2013 car outright from a private owner, you will have NO PAYMENTS and can spend that money on investments and build your wealth.


To focus on your question.. pay it off then trade in. The reason is because say you just have 14k laying around and buy a car for 14k, you must pay 14k plus tax. If you are in one of the states that allows the tax break, then trading the 14k valued vehicle in for a 14k vehicle will nullify your sales tax. As per your question, if you traded the car in at 7k, you would then owe 7k plus tax. You only have 7k..so how would you pay for the tax and why would you want to? Pay off the car and you'll have 14k of tax free off any car.

  • Coincidentally... I just made the last payment on the car tonight :-) – Don Jul 11 '16 at 5:00

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