Having finance owing on your current car does not necessarily mean you have to keep it until the loan is completely repaid. A financed vehicle may potentially be traded in, but the existing finance and any security interest need to be dealt with as part of the transaction. The key numbers are the lender's settlement figure and the vehicle's trade-in value. Comparing the two shows whether you have positive equity, no equity or negative equity in the car.
Key takeaways
- ✓A car with finance owing may potentially be traded in, but the existing secured debt needs to be dealt with.
- ✓Ask your existing lender for a current settlement figure before relying on the balance shown on your account.
- ✓If the car is worth more than the settlement figure, the difference represents positive equity.
- ✓If the settlement figure is greater than the trade-in value, you have negative equity.
- ✓Negative equity does not disappear when you trade the vehicle.
- ✓Do not sell or dispose of property subject to a security interest without dealing with the secured party's rights.
Can you trade in a car that still has finance owing?
Potentially. The existing finance must be taken into account before the vehicle can be traded free of the lender's security interest. The exact process depends on the existing credit agreement, lender, dealer and any replacement finance.
Finance owing does not automatically prevent a trade-in, but the existing loan and security interest need to be settled or otherwise dealt with as part of the transaction.
Why does the existing lender matter?
A vehicle used as security for a loan can be subject to a registered security interest. The Personal Property Securities Register states that property subject to a security interest must not be sold or disposed of without permission from the person or company to whom the money is owed.
What is a car loan settlement figure?
A settlement figure is the amount required to repay the existing finance in full on a specified date. This is the number you need when working out how much equity you have in the vehicle.
Ask your lender for a current settlement figure rather than assuming your remaining scheduled repayments equal the amount needed to clear the loan.
Trade-in value vs settlement figure
Once you know the vehicle's trade-in value and the amount required to settle its finance, the basic calculation is straightforward.
| Comparison | Result |
|---|---|
| Trade-in value is higher than settlement figure | Positive equity |
| Trade-in value equals settlement figure | Approximately no remaining equity |
| Trade-in value is lower than settlement figure | Negative equity |
What is positive equity in a financed car?
Positive equity means the vehicle is worth more as a trade-in than the amount required to settle its finance. The remaining amount after the existing loan is cleared may potentially contribute toward the replacement vehicle.
In this example, clearing the $18,000 settlement from a $25,000 trade-in value leaves $7,000 of equity.
| Positive equity example | Amount |
|---|---|
| Trade-in value | $25,000 |
| Finance settlement | $18,000 |
| Positive equity | $7,000 |
What is negative equity?
Negative equity is the opposite situation: the amount required to settle the finance is greater than the vehicle's trade-in value. This can happen because vehicles can depreciate faster than the loan balance falls, particularly earlier in some finance terms.
| Negative equity example | Amount |
|---|---|
| Trade-in value | $20,000 |
| Finance settlement | $25,000 |
| Negative equity | $5,000 |
What happens to negative equity when you trade the car?
The $5,000 difference in the example above still needs to be dealt with. Trading the car does not make that debt disappear. How the shortfall is handled depends on the transaction and any finance available.
Treat negative equity as existing debt that still has to be accounted for, not as part of the car's value.
Can negative equity be included in new car finance?
Whether additional finance is available to cover a shortfall depends on the lender, replacement vehicle, loan structure and individual application. Do not assume the shortfall can automatically be added to the next car loan.
Why can rolling negative equity forward be expensive?
If a shortfall is included in replacement finance, you may begin the next loan owing more than the amount attributable to the replacement vehicle itself. That can increase the amount financed, repayments and interest costs.
| Example replacement transaction | Amount |
|---|---|
| Replacement vehicle | $35,000 |
| Existing negative equity | $5,000 |
| Combined amount before deposit or fees | $40,000 |
Does a dealer pay off your old car loan?
A dealer may arrange for existing secured finance to be settled as part of a trade-in transaction, but you should understand exactly how the settlement is being handled. Check the paperwork rather than assuming the loan has been cleared simply because you handed over the car.
How do you know the old security interest has been removed?
The PPSR says that after consumer debt secured over goods has been repaid, the secured party must discharge the registered financing statement within the required period. You can search the PPSR to check information recorded about security interests.
Keep documentation showing how the existing finance was settled and do not rely only on a verbal explanation.
Why might your trade-in offer be lower than expected?
A dealer's trade-in figure is not necessarily the same as the price you might see similar cars advertised for. The offer can reflect the vehicle's age, condition, mileage, market demand and the dealer's costs and resale expectations.
Should you trade the car or sell it privately?
A private sale and dealer trade-in involve different processes. A private sale may produce a different price, but if the vehicle is subject to a security interest you still need to deal appropriately with the secured finance before disposing of it.
| Trade-in | Private sale |
|---|---|
| Can simplify changing vehicles | Requires you to manage the sale yourself |
| Dealer provides the trade-in offer | You set and negotiate the asking price |
| Existing finance can potentially be dealt with within the transaction | You need a clear process for dealing with secured finance |
What should you do before visiting a dealer?
Knowing the important numbers beforehand makes it easier to understand the trade-in transaction.
| Before trading in | Why |
|---|---|
| Get a settlement figure | Shows what is required to clear the existing finance |
| Estimate the vehicle's value | Helps you understand your likely equity position |
| Check your current agreement | Identifies relevant settlement or early-repayment conditions |
| Work out your budget | Helps establish what replacement finance is affordable |
| Compare replacement finance | Avoids judging the next loan solely by its weekly repayment |
Don't focus only on the changeover figure
A dealer may present the transaction as the difference between your trade-in and the replacement vehicle. That number can be useful, but it does not tell you the complete cost of the new finance. Check the actual amount being financed, interest rate, fees, loan term and total amount repayable.
What happens with NZTA when the car changes hands?
NZTA requires both sides of a vehicle transaction to notify it when a vehicle changes hands. NZTA records the registered person rather than legal ownership, so this administrative change is separate from settling any secured finance attached to the vehicle.
Checklist for trading in a financed car
Before completing the changeover, make sure you understand both the old debt and the new transaction.
| Check | Question |
|---|---|
| Settlement | Exactly how much is required to clear the existing finance? |
| Trade-in value | How much is the dealer allowing for the current vehicle? |
| Equity | Do you have positive or negative equity? |
| Old security | How will the existing secured finance be discharged? |
| New amount financed | How much debt will you have after changing vehicles? |
| New finance cost | What are the rate, fees, term and total amount repayable? |
Compare finance when changing cars
If you are replacing a vehicle that still has finance owing, understanding the existing settlement and your equity position is an important part of working out what the next purchase will actually cost. EveryLoan refers visitors to Simplify Finance, where applications, lender matching, credit decisions and funding are handled by Simplify Finance and its lender partners.
EveryLoan is not a lender. Whether existing debt can be settled within a replacement transaction and what new finance is available depend on the lenders and your individual circumstances.
Frequently asked questions
Potentially. The existing finance and any security interest need to be dealt with as part of the transaction.
Ask your existing lender for a current settlement figure showing the amount required to repay the finance in full on a specified date.
Positive equity means the vehicle's trade-in value is greater than the amount required to settle its finance.
Negative equity means the finance settlement figure is greater than the vehicle's current trade-in value.
No. Any shortfall between the vehicle value and the amount required to settle the existing finance still needs to be dealt with.
Whether finance is available for a shortfall depends on the lender, replacement vehicle, loan structure and your individual application.