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How to trade in a car that is not paid off

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If the time has come to get a new vehicle but you still have not completely paid off your loan, there are still options for trading in your car. The process will take some preparation and differ depending on your state of equity. 

  • If you have positive equity it means that the value of your car is worth more than the amount left on the loan. This is a good spot to be in. It allows you to take that additional value and put it towards the cost of the new vehicle. 
  • If you have negative equity or are upside down on your loan, a trade-in can be a bit more challenging. This means that you owe more on the vehicle than it is worth. It’s a precarious financial situation where you will have to pay the remaining loan balance after the trade-in value is assessed.  

How to trade in a car that is not paid off  

It is not uncommon to trade in a car before you pay it off. Provided you have positive equity, you can turn your current vehicle into a down payment. But even with negative equity, trading in your car for something cheaper can help you recoup some of your losses.  

Either way, there are a few essential steps to trading in your car when you still have a loan. 

1. Collect the necessary documents 

Dealers will want to see basic information about yourself and your loan, including:  

  • Your driver’s license   
  • Proof of income and residency 
  • Vehicle title 
  • Loan payoff amount and account information 
  • Vehicle keys  
  • Vehicle insurance 

2. Find your car’s trade-in value  

Tools available on Kelley Blue Book (KBB) or Edmunds can help you calculate your car’s worth. After you figure it out, use that trade-in number to determine how much money you will have left towards the new vehicle purchase. Simply subtract your remaining loan amount from the trade-in value.  

Knowing the value of your vehicle will help you to negotiate and can help you choose your new car with the full scope of your budget in mind.  

3. Shop around   

Once you know the value of your vehicle, you can visit dealerships and request trade-in quotes. Remember: You don’t have to trade in your current car at the dealer where you buy your next one. So, take the time to see what dealers will offer you — and compare those offers to your findings from KBB and Edmunds.  

Ideally, you’ll want to trade in your vehicle for more than the amount remaining on your loan. This will ensure you have extra to put toward your next car.  

If you can’t — meaning you’re upside-down on your loan or have negative equity — try to get the best deal possible. Otherwise, you’ll be stuck paying whatever is left over out-of-pocket. Or worse, rolling over the remaining loan amount into a new loan. 

4. Make the deal    

After you shop trade-in options, work with the dealer to complete the process. You should walk away with a check that you can send to your lender to pay off your trade-in — though some dealers may be willing to do this part for you. Even if they do, follow up to ensure the money gets where it’s supposed to go. 

If you have positive equity, you can use the rest as part of a down payment toward another vehicle. From here, compare current auto loan rates and start shopping for your next car.  

Why you shouldn’t trade in a car with negative equity   

If you are interested in getting a new vehicle but have negative equity on your current loan, it is recommended that you postpone trading it in until you are no longer underwater. By rolling the loan over into a new one, you are putting yourself and your bank account at risk.  

While it is likely that you will encounter dealerships that push for you to roll over your negative equity into your new vehicle, this will lead to higher interest rates and loan amounts — not something you want.  

Think of it like this: Drivers who choose to go ahead with a trade even with negative equity are responsible for paying both the amount left on the loan and the value of the new car. You are essentially still making payments on a car you no longer drive and increasing the chance that you’ll be underwater on your next vehicle.  

Alternatives to trading in your car   

If you are upside-down on your car loan, the best alternative is clear: Don’t trade in your car. Keep making payments — including additional ones if you can — and wait to switch cars until you’re in a better position financially. It may not be ideal, but it likely is the route that saves you the most money.  

If you have positive equity, you may want to consider a private sale. These will typically result in more money for you. But expect an added headache of getting permission from your lender, waiting for the buyer to send money and paying off your loan yourself.  

The bottom line  

Once you understand how much your vehicle is worth compared to how much you owe, you can start shopping around for the best trade-in deals. Because most people don’t stick with their cars for the full loan term, you should be able to find a dealer that accepts cars that aren’t paid off. 

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Auto loans editor