Originally Posted by alkemist

If you trade it in to the dealer, the trade in money goes to pay off the lien holder first and then you are liable for the cost of the new car, i.e. getting another loan. If there is left over money from the trade-in, it gets credited to the car you are purchasing.

Forgot to add, if your trade-in doesn't cover the full lien owed, you are liable for that too, they'll be happy to roll it into the new loan you are getting if you are getting financing from the dealership.

Originally Posted by moosestang

Fixed it for you!

Originally Posted by wcgman

You owe 12k on your car to the bank.
You go to trade your car in on a new one for let's say 20k (just for numbers sake)

First dealer offers you 10k for your car and agrees to "pay off the balance."
He pays the bank 12k.
There's a 2k difference between what he paid the bank (12) and what he offered you for the car (10), so now you owe him 2k.
He tacks that 2k onto the loan for the 20k car, so you've just paid 22k for that car.
That's called negative equity.

You go to a different dealer and he offers you 15k for your car.
He pays the bank 12k.
He owes you 3k.
He applies that 3k towards the 20k car, so the balance owed is now 17k.
You take out auto loan for 17k.
Because you only owe 17k on a car that sells on the open market for 20k, you have positive equity of 3k dollars.
lol - here's what sucks. You put the keys in it and drive down the street to put gas in. Car's value has declined about 2000 dollars, so now you're down to 1k in equity

Hope this helps as this is about as over simplified as it gets, but it should clear the air. Taxes, dealer fees (which in most places is taxable too!) can complicate things as well.

For example...in Colorado you only pay taxes on the difference between the trade in amount and the purchase price. So in the first scenario...

New car price = 20k
Trade in amount = 10k.
You pay taxes on 10k of the new car.

Scenario 2.
New car price = 20k
Trade in amount = 15k
You pay taxes on 5k of the new car.

On trading my '10GT in on the Shelby. If I had bought it outright I would have been paying about 3500 in taxes. Because of the trade, Im only paying 600 in taxes.

Originally Posted by 2011MUSTANG5.0L

Also, you have to be "firm" with salesmen. I'm not saying to be an ***....just tell them where you need to be whether it be payments/price. If they don't want to deal, walk away.

Originally Posted by moosestang

I'm pretty sure here in Florida we have to pay tax on the sticker price of the car. So even if you talk the dealer down $5k on a $30k car, you are stuck paying tax on $30k. When we traded my wifes car in, we still paid tax on the full value.