How soon can you trade-in a financed car in Canada?

By Arthur Dubois | Published on 13 Jul 2023

a car and hands with black outline

    Considering trading in your financed vehicle in Canada? With the average new car loan payment now reaching an eye-opening $880 per month, it’s no surprise that many Canadian drivers are reevaluating their options. This spike in monthly payments, a direct result of rising interest rates and vehicle prices, has significantly impacted car ownership decisions. In this article, we will delve into the ins and outs of trading in a financed car in the Great White North. So buckle up and let’s hit the road!

    When Can You Trade-In a Financed Car?

    Generally, you can sell a car with a loan on it at any time, regardless of whether you’ve paid off the loan. However, if you still have a significant amount left on your loan, trading in too soon  may leave you in a deeper hole. With a trade-in value less than the outstanding loan balance, you’ll have to pay the difference out of pocket. That can really hurt if you already struggle to pay your bills. Even worse, you could roll it into your new loan, compounding the money you owe. This move would increase your overall debt as you pay interest on your previous car and your new one. 

    On the other hand, if you’ve made substantial payments, the equity you’ve built up could help offset any gaps. In this case, trading in your financed car becomes easier, as the trade-in value may exceed the outstanding loan balance.

    When considering trading in a financed car, take into account the vehicle’s depreciation. Cars typically lose value over time. So, if you’ve had your financed car for a few years, it may have already experienced significant depreciation. This could impact the trade-in value offered by the dealership.

    Furthermore, the condition of your financed car plays a role in determining its trade-in value. If the car has been well-maintained, with regular servicing and minimal wear and tear, it will likely fetch a higher trade-in value. On the other hand, if you’ve neglected the car or it has significant damage, that amount may drop.

    How Does Trading-In a Financed Car Work?

    When you trade in your car, the dealership will assess its physical state and offer you a trade-in value. This will count towards the purchase of your new vehicle, effectively reducing the amount you need to borrow. The dealership will also handle paying off the remaining loan balance to the lender on your behalf.

    However, the trade-in value offered by the dealership may undercut than what you would receive by selling the car privately. However, trading in your financed car can save you time and effort. Plus, it eliminates the hassle of negotiating with potential buyers and handling paperwork.

    Once you select your new vehicle from the dealership’s inventory, the business will subtract the trade-in value from the purchase price of the new car. This way, you reduce the amount you need to finance or pay upfront.

    Keep in mind that while trading in a financed car, you must still pay off the remaining loan balance. You may need to negotiate with the dealership to find a solution that works for both parties. Additionally, if you still owe money on your current loan, the lender may have specific transfer requirements or procedures.

    Overall, trading in a financed car offers convenience and simplicity, especially if you upgrade to a new vehicle. However, always do your research, assess your financial situation and consider all factors before making a decision. By understanding the process and getting prepared, you can ensure a smooth trade-in experience.

    Factors Affecting the Trade-In of a Financed Car

    Of course, a variety of factors influence the bottom line when it comes to trading in a financed car. Much of this relates to how much you’ve invested to pay down your loan and the terms of that debt. Further, it helps to understand how your car’s value has held up over the years.

    Car Equity

    Car equity plays a significant role in determining whether a trade-in works to your financial benefit. The higher your car’s equity, the more likely you’ll be able to trade it in without incurring extra debt. Therefore, try to make extra payments or pay off the loan as much as possible before considering a trade-in.

    When it comes to car equity, you have a few key factors to consider. First, a larger down payment creates higher initial equity, which helps when it comes time to trade in the car. Additionally, the interest rate on your car loan can affect the rate at which you build equity. Lower interest rates mean more of your monthly payment pays down the principal, increasing your value at a faster pace.

    Depreciation

    Naturally, your car will lose some value over time. As a car ages, its value naturally decreases. This depreciation can impact your equity, as the outstanding loan amount may not decrease at the same rate as the car’s value. Understanding the depreciation rate of your car can help you make informed decisions about when to trade it in.

    Generally, most vehicles depreciate by 20 percent in the first year in Canada. In fact, their worth decreases one-tenth as soon as you drive it home. After that, the value drops between 10 to 15 percent for each subsequent year. 

    Based on the average price of a new car in Canada, here’s how depreciation takes effect based on 10 per cent per year:

    Time elapsed since purchaseValue of the car
    Before being sold$60,000
    1 hour$54,000
    1 year$48,600
    2 years$39,370
    3 years$35,430
    4 years$31,900
    5 years$28,710

    These factors have the highest impact on a car’s falling worth:

    • Higher mileage 
    • Poor condition with scratches, dents and damaged paint
    • A history of collisions and repairs
    • Lower fuel-efficient 
    • Low safety and reliability rating
    • Lack of technology, like Bluetooth, remote start or heated seats

    Meanwhile, certain models, like Jeep Wranglers and Toyota Tacomas, keep their value better than vehicles with less staying power. Overall, it depends on what people appreciate and will spend to acquire.

    Car Loan Term

    The length of your car loan term can also affect the viability of trading in your financed car. Opting for a shorter loan term allows you to build equity faster, making it easier to trade-in sooner. Conversely, a longer loan term may mean it takes longer to build equity. As a result, you could risk owing more than the car’s value if you trade in too early.

    Ultimately, it may come down to what you can afford each month. Spreading the payments out over a longer term will cost more in interest, but less each month. Of course, you always have the option to pay down the principal to shorten the loan if you can.

    Car Loan Interest Rate

    How much you pay in an interest rate has a huge impact on your monthly payments and the overall cost of a vehicle. Each payment included part of the principal and our interest. With each percentage point, you hand more money over to the lender. As expected, this really adds up over three years.

    For example, if you plan to buy a new car for $60,000, you may offer a $5,000 down payment and a three-year term. At the Canadian average rate of 7.69 percent, on the remaining $55,000 owed, your total loan payments will add up to $61,763 over three years. Each month, you will pay $1,716.

    However, if you have a troubled credit history, a lender may seek a higher rate. Here’s how differently the loan calculations can work out. 

    Interest rateMonthly paymentTotal after 3 years
    7.69%$1,716$61,763
    14% $1,800$67,672  
    21%$2,072$74,597 

    The rate you pay feels the effects of four key factors:

    • Credit score. Those with higher scores generally have access to lower car loan rates, so improving your credit history helps lower the interest rate on your car loan.
    • Income. Lenders look at your income since it reflects your ability to pay back the loan. Naturally, you’ll have a better chance of loan approval and lower interest rates if you earn a larger salary. 
    • Debt ratios. Perhaps you already pay much of your income out on a large mortgage or other debts. If so, lenders may want to see a low debt-to-income ratio to make sure you can afford your loan.
    • Type of loan. Banks and credit unions typically offer fixed and variable interest rates for car loans. Variable rates fluctuate with the market so watch for what they charge. If you have had bad credit in the past, these lenders may not work with you. Instead, you may need to apply at a non-traditional lender, who tends to charge higher rates due to the higher risk.

    Is Trading-In a Financed Car a Good Idea?

    While you may wish to trade in your car every three years, keeping it can help your finances. Let’s look at one specific example. For example, what if you bought a car three years ago for $40,000? Based on average depreciation, it’s now worth $26,250 – a depreciation of $13,750. Maybe you feel it would make sense to capture the value with a trade-in before that number drops any further. 

    To find out, divide the depreciation amount by the 36 months you have owned the car. That way, you discover that you paid $382 per month in depreciation to own the vehicle.

    However, if you keep the car for another 36 months, you may see the value of the vehicle drop from $26,250 to $19,000 (a loss of $7,250). That means that for the next three years, you will pay $201 in depreciation every month.

    Ultimately, if you keep the car for three years, you “lose” $382 per month in value depreciation. If you factor in the next three years, your depreciation totals $21,000 ($13,750 plus $7,250). Now, you’ll “lose” $292 per month overall.

    Car’s valueTotal depreciationMonthly loss in value
    At purchase$40,000N/AN/A
    Three years later$26,250$13,750$382 (based on 36 months)
    Six years later$19,000$21,000$292 (based on 72 months)

    Keep these numbers in mind when you visit a dealership and they offer you a price. Take that offer and compare it to your depreciated value. Next, look at your monthly depreciation amount in contrast to your current loan payment (if you still have one). Does it make sense to take on a new loan at a higher amount? Or ride it out with your current car? Only you can decide, but these equations may help. 

    Steps to Trade-In a Financed Car in Canada

    Ready to trade in your financed car for a shiny new set of wheels? Follow these steps:

    Evaluate Your Car’s Worth

    Begin by researching the market value of your car based on its make, model, year, mileage and condition. Keep in mind that the trade-in value will likely be lower than the market value due to dealership margins.

    Several online tools, such as the Canadian Black Book, can help you estimate its value. You can also turn to the Kelley Blue Book or CARFAX site to analyze what the market offers for your particular model. 

    Also, check local listings for cars like yours to see their list prices. This can give you a better view of what people will pay in the current market in your area.

    Finding a Suitable Trade-In Deal

    Once you have a fair understanding of your car’s worth, visit multiple dealerships to receive trade-in offers. Don’t be afraid to negotiate and play dealerships against each other to get the best deal. Consider factors such as the offered trade-in value, the price of the new car, and any incentives or promotions available. Remember, you aim to minimize negative equity and maximize your trade-in value.

    Transfering or purchasing a new car insurance policy

    If you decide to trade in your car, contact your insurance company for coverage for your new vehicle. You cannot drive your new car until specific, mandatory types of insurance coverage, such as collision and liability.

    Even if you stick with your current set of wheels, consider comparison shopping for car insurance. You may discover that you can score a better premium or more in-depth coverage. The factors affecting your premiums, such as age and time since a collision, can improve over time if you keep a clean driving record. So, shop around to try to save a few dollars!

    Paying off or rolling-over your old car loan

    If you have a choice between paying off one loan or rolling it into a new one, take a hard look at the numbers. After all, you would be adding the debt from our old car to the loan for the new one. This will make the total you pay for the new model even higher, due to a higher principal and more interest on the loan.

    Since your new car depreciates quickly, you may end up paying more as the gap between the car value and your loan payment widens. In short, you pay far more for a car in its prime depreciation period.

    Instead, focus on paying down your original loan and wait before you splurge. This will also give you a chance to save up a decent down payment, lowering the amount you need to borrow.

    Transferring the car ownership

    If you decide to proceed with the trade-in, ensure you have all the necessary paperwork in order. This includes the vehicle ownership documents, loan agreement, service history and any additional warranties or accessories. The dealership will guide you through the remaining process, handling the loan payoff and transferring ownership to the new vehicle.

    Trading-in a financed car in Canada: The Bottom Line

    There you have it! Now you’re equipped with the knowledge to confidently trade in your financed car in Canada. Remember to weigh the pros and cons, consider your equity position, and shop around for the best trade-in deal. So go ahead, hit the gas and get ready to enjoy that new car smell!

    Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications