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How To Trade A Car That Is Not Paid Off

Last updated 03/07/2024 by

Jamela Adam

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The first step if you want to trade in a car before paying off your auto loan is to learn the value of your car and the remaining balance on your loan. This will tell you the car’s equity, which may be positive or negative. Positive equity means the car’s value is greater than that of your loan’s balance, and negative equity means the exact opposite.
You’re tired of driving your old car and want to trade it in for a new one. The only problem? You still haven’t paid off your car loans. Trading in a car with outstanding loan payments takes a few extra steps and might be a bit more complicated, but it’s not impossible. To make the process as smooth as possible, it’s important to do thorough research beforehand.
Here’s everything you need to know about how to trade in your car before it’s completely paid off and whether it’s the best financial decision for you.

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How does a car trade work if you still owe money?

Before making the decision to trade in your car, it’s important to find out its trade-in value and the amount you have yet to pay off in your current loan balance.

How to trade in a car that has a loan

  1. Price your car. Figuring out your car’s current value can be done a couple different ways. You can do it yourself using the appraisal tools by Kelley Blue Book or Edmunds or get an estimate from a car dealer.
  2. Figure out the payoff amount. To figure out the payoff amount of your existing loan, simply contact your lender. The amount will probably be slightly higher than the remaining balance on your loan because it also takes into account the interest you owe.
  3. Determine whetheyou have positive or negative equity. Once you have the value of your car and your remaining loan balance, you can determine whether your car has positive or negative equity.
    • Positive equity means that the trade-in value is higher than the payoff amount.
    • Negative equity means the value is lower than the balance.
  4. Take the loan information to the dealership. This assumes you choose to roll in the existing loan into a new auto loan, which is often not a great idea. The dealership will want to know the payoff amount and the loan’s account number.
  5. Provide ID and documentation. You will need to show your driver’s license, vehicle registration, and proof of insurance.
  6. Hand over the keys (and any remotes) of the car you’re trading in. Note that trading in a car is not always the best move. You may be able to get a better deal selling it yourself.
Knowing whether you have negative or positive equity in your car can then help you decide whether a trade-in is a financially-wise option for you.

How can you trade in a car if you owe more than it’s worth?

While this might complicate the process, there are two ways to help this transition.
  1. Pay off the negative equity at once. For example, if you still owe $15,000 on your vehicle and the dealer offers $10,000 for the trade-in, you could make up the difference by paying $5,000 out of pocket and get rid of your car’s negative equity.
  2. Roll the negative equity over to your new car loan. Though this option is often not recommended, it could be helpful for those who don’t have enough cash in the bank to pay off negative equity all at once. Let’s say you currently owe $10,000 on your car and the dealer is offering $8,000 for the trade-in. The $2,000 difference would be rolled over to your new car loan. However, be cautious about rolling over negative equity into a new loan since it could mean larger interest payments.

Can you swap financing from one car to another?

No, you can’t swap financing from one car to another. You also can’t take your current car off the agreement and replace it with the new car you intend to purchase.
If you have negative equity on your old car, what your dealer will often do is roll over that amount into the new car loan if you’re unable to pay it off at once. Essentially, you’ll then be paying off two auto loans at once. Though convenient, you may want to avoid this option because you will immediately owe more than your car is worth.

Trading in a car with negative equity

If you have negative equity in your car, it is probably a good idea to postpone the trade-in. Doing this will allow you to continue paying off your loan balance until you achieve positive equity. However, if you’re in a dire situation and need a new car immediately, it’s still possible to trade in your vehicle. Keep in mind, though, that you’re still responsible for paying down your negative equity eventually.
Let’s say the vehicle’s trade-in value is $8,000 and the payoff amount is $10,000. That means you’ll still need to pay the lender the $2,000 difference.
If you’re not in the financial position to pay off that amount in one fell swoop, dealerships might give you the option to roll the negative equity into your next car. This means you’re paying interest on both your old loan and your new loan, which can put you in a worse financial situation in the long run.

Trading in a car with positive equity

Assume that you only owe $3,000 on your car and the trade-in value is $8,000. You now have $5,000 at your disposable that you can apply directly to your next car purchase. This amount could be subtracted from the negotiated price of the new car in the form of equity or a down payment.
In most cases, you won’t be able to completely cover the cost of the new car with the positive equity from your old one. So make sure you can finance the remaining cost of the new car, whether it’s through an auto loan, cash, or a personal loan.

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Do your research before trade-in

When it comes to trading in your car before paying it off, you don’t want to make a hasty decision. There are many factors that go into making a trade-in deal. If you’re not careful, you could end up losing money.
For instance, dealerships make a profit on trade-ins, and they may not be as willing to give you a good deal. So, in some cases, it may be better to sell your car privately and then use that money to pay off the remainder of your loan. But also be aware that selling your car privately can come with a considerable amount of work, such as listing the car, screening potential buyers, and signing over the car title.
If you do decide to trade in your car, be prepared to negotiate. The price of the new car and the value of your current one are both negotiable. So don’t just go with the first offer a dealer offers. Try to compare as many offers as you can from different dealerships. By being informed and taking your time, you can make the best decision for yourself.

Pro Tip

When trading in your car at a dealership, make sure that all oral promises are included in the contract. Most importantly, don’t sign the contract until you’ve read the terms carefully and know the exact amount of your new monthly car payment.

What is a good credit score to trade in a car?

When trading in a car and applying for a new car loan, it’s best to have a good credit score to ensure you’re getting the best interest rate. In general, lenders like to see borrowers with credit scores of 661 or higher. According to a 2021 report released by credit bureau Experian, over 65% of cars financed during the year were for buyers with a “prime” credit score of 661 to 780.
So if you’re looking to trade in your car for a better one soon, don’t forget to work on your credit score by making car payments on time.

Is it a good idea to trade in a financed car?

Before you decide whether it’s a good idea to trade in a financed car, it’s important to understand that cars are depreciating assets. According to industry expert data from Carfax, a new vehicle’s value decreases by roughly 20% within the first year of owning the car. And after owning the car for 5 years, you can expect its value to be merely 40% of its purchase price.
So if you’ve already had your vehicle for some years now and still owe car payments on it. It’s likely that the amount you owe on the auto loan is actually more than the car’s trade-in value. If this is the case for you, you might want to hold off on trading in the car — unless you’re comfortable with paying off your negative equity at once or transferring your negative equity onto your new car.
However, if you’re currently driving an old car that consumes a lot of fuel, it might be a good idea to trade it in for one that is more energy-efficient and has better gas mileage. Try your best to crunch the numbers before purchasing a new car to make sure you’re saving more money in the long term. At the end of the day, it won’t make financial sense if you purchase an outrageously pricy car just for the sake of saving gas.

When should you not trade in your car?

In most cases, you should not trade in a car when it’s just newly purchased. Have you ever heard, “The minute you drive a new car off the lot, it drops in value”? It’s true.
According to Edmonds, your new car loses 11% of its value the moment you drive it off the dealer’s lot. So if you’ve only had your car for a few months and you’re eager to trade it in for a bigger and nicer car, take the time to reconsider your decision. The amount you owe on the car is very likely to be more than its trade-in value at this point. So it’s best to wait until the equity on the car turns positive.

Key Takeaways

  • Before trading in your car at a dealership, it’s important to first figure out your car’s trade-in value and the payoff amount of your loan.
  • Negative equity means the vehicle trade-in value is lower than the loan balance. Positive equity means the vehicle trade-in value is higher than the loan payoff amount.
  • If you have negative equity in your car and decide to trade it in, you’ll still be responsible for paying off the negative equity. You can do this by paying it in cash all at once or rolling it over into your new loan.
  • Dealerships are in business for a reason, and they expect to make a profit from each sale. So when you trade in your car, expect to negotiate for a higher offer.
  • Avoid trading in a newly purchased car. If you took out a loan for it, then the car probably has negative equity due to the rapid depreciation that occurs once you drive the car off the dealership lot.
  • To make sure you’re getting the best interest rate for your next car purchase, try to keep your credit score in or above the “prime” category, which is a score of 661 or above.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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