How to trade in a car when you’re still paying off the loan

Woman sitting with laptop on living room floor, looking up trading in a car with a loanImage: Woman sitting with laptop on living room floor, looking up trading in a car with a loan

In a Nutshell

Trading in a car with a loan is possible, but it can be costly depending on how much you owe. If your car is worth more than you owe on it, you may be able to use the difference toward the purchase price of a new vehicle. But if the opposite is true, you may want to pay down your loan before moving forward with a trade-in.
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When you’re looking to get a new set of wheels, you may be anxious to get rid of your old car — even if you still owe money on it.

But trading in a car with a loan could cost you if you have negative equity, meaning you owe more on your loan than your car is worth. Let’s take a look at your potential options — whether you have positive or negative equity — and how to trade in a car with a loan balance.

Can I trade in my car if it’s not paid off?

In general, you can trade in your car for a new one even if you’re still making payments on it. But first it helps to know how much equity you have in the vehicle. That’s the difference between your car’s current value and the amount you owe on the loan. Depending on those two factors, you have either positive or negative equity.

Positive equity

If your car is worth more than you owe, you have positive equity. As the name implies, positive equity is a good thing. When you trade in your vehicle, the dealer may apply any equity you have toward the purchase of the new vehicle. This reduces the amount you need to finance.

Negative equity

If you owe more on the loan than your car is worth, you have negative equity — and you’re not alone.

Looking at new-car sales with vehicle trade-ins in April 2020, 44% were negative equity trade-ins, according to Edmunds data — with an average of $5,571 remaining on the loan. If your vehicle has negative equity and you want to trade it in, you’ll need to decide which is your best option.

  • Roll the negative equity into your new car loan. While this option may be convenient, it increases your new loan amount, which means you could pay more in interest over the life of the loan. And going this route typically means borrowing more than your new car is worth, which puts you at greater risk of becoming upside down again. 
  • Pay the difference between the trade-in value and your remaining balance. If you have the cash on hand, you can pay the difference between what you owe on your current loan and what the dealer is offering you for your trade-in. This can help keep your new loan amount lower.
  • Delay the trade-in. You might also wait to trade in your car until you pay off your car loan or — at the least — are no longer upside down.

How soon can you trade in a financed car?

You can trade in a financed car any time, but you may want to wait a year or more — especially if you bought a new car. Cars depreciate over time. A brand-new car can decrease in value by 20% or more within the first year of ownership, then loses value more slowly in the following years. Depending on the size of the down payment you made on your loan and how quickly your car has lost value, you may find that you have negative equity in the vehicle almost immediately.

How do you trade in a car with a loan?

It pays to get a good trade-in value — the higher the amount, the more you can potentially use toward your new car purchase. Here are some steps to take. 

1. Research the value of your trade-in vehicle

Knowing your car’s estimated fair market value can help you get a sense of what a dealer might offer on your trade-in and give you some negotiating power. Websites such as Kelley Blue Book and Edmunds have tools that can help you estimate your car’s trade-in value based on information including the year, make and model of your car, and the number of miles on its odometer.

To get a better sense of whether you have positive or negative equity, you should compare your car’s estimated trade-in value to your loan payoff amount. This includes your loan balance plus any interest and fees that have accrued, so it may differ slightly from your loan balance. Contact your lender to find out your payoff amount.

If you have positive equity, you can use what the dealer offers you for your trade-in to pay off your existing loan and use any leftover money as a credit toward the new car purchase. But if you have negative equity, you’ll need to decide whether to postpone your trade-in, pay down your existing loan or roll your loan balance into the new car loan.

2. Compare trade-in offers and negotiate

Contact a few dealers to get trade-in value estimates. If you feel a dealer is offering a low-ball price, you can negotiate using the car value estimates you researched. Getting multiple estimates can help you make sure you get the best deal for your situation.

Keep negotiations for the new car purchase and your trade-in separate. Some dealers may try to mark up the price of the new car to make up for a high trade-in amount. If you have negative equity and decide to roll your current loan balance into your new loan, be sure you understand the total loan amount, annual percentage rate, loan term and your new monthly payment before agreeing to a deal.

3. Close the deal

Once you’ve agreed on a value for your trade-in vehicle and the new car’s price, it’s time to close the deal. Read the sales contract carefully — it should spell out your new loan amount, the loan term, interest rate, monthly payment and any other spoken promises made during negotiations. It should also detail how any negative equity is being handled. Some dealers may advertise that they’ll pay off your car loan — no matter what you owe on it — and instead just fold the negative equity into your new loan.

Alternative to a trade-in

Trading in your car at the dealership isn’t your only option. You can also sell your car to a private buyer, though you may need to let your lender know first. While it may take longer, you’ll likely get more money for your car in a private sale than with a dealer trade-in, which could help offset any negative equity.

Ask an expert about trading in a car with an outstanding loan

Meet the expert: Brian Moody, executive editor for Autotrader and spokesperson for Kelley Blue Book, has more than 12 years of experience as an automotive journalist.

Is it a good idea to trade in a car when you’re paying off a loan on the same vehicle?

“Generally speaking, no. It’s not a good idea to trade in a car when you still owe money on the loan you purchased to buy that car. It is possible, but the dealership is simply going to add the remainder of the loan to the price of your new car. Make sure your loan allows you to pay it off early. If not, the dealership may pass that fee on to you.”

What should consumers be aware of when trading in a car with a remaining loan?

“Your new loan will simply roll the unpaid part of your old loan into the overall price of the car. That means you’re paying more for the car and for the financing.”

Do you have any negotiating power when trading in a car with a loan?

“Maybe. If you have a very popular and desirable model, that might help. Also, if you owe very little on the old car, you will still have some negotiating room. Remember, there’s no free money. The dealership is in business to make money selling things, not getting you out of a car where you previously overpaid.”

What’s next?

Understanding your car’s estimated value and how much you owe on it are important first steps in trading in a car with a loan. Trading in a car with negative equity could end up being an expensive move in the long run.

If you can’t afford to finance the car you want because you need to roll over some negative equity, consider trading in your current car for a less-expensive one. While you’ll still need to carry over the negative equity from your current auto loan, your total loan amount will be lower — and you may pay less in total interest on the loan.

About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma,, U.S. News & World Report, and more. Her favorite topics include maximizing credit card rewards and budgeting. Wh… Read more.