Key takeaways

  • If you owe more than the car is worth, meaning you have negative equity, you should pay off a car loan before you trade it in.
  • If you have positive equity on the car, meaning you owe less than the car is worth, you can trade it in and use the positive equity towards a new vehicle.
  • If you have negative equity, look into alternatives, like selling the car privately for a higher price.
  • Always check prices in your area to ensure the trade-in offer from the dealership is competitive.

You can trade in a car that is not paid off. Dealerships are used to handling vehicles under liens. But whether it’s a good idea depends in part on whether you have positive or negative equity.

How to trade in a car that is not paid off

It is common to trade in a car before paying it off. With 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 reduce your losses.

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. Knowing the value of your vehicle will help you negotiate your trade-in offer. It can also help you choose your new car with your budget in mind.

It will also help you determine if you have positive or negative equity. Subtract your remaining loan amount — based on the payoff amount your lender quotes you — from the average trade-in value. You will get a negative number if you are upside-down on your loan.

3. Shop around

Once you know the value of your vehicle, you can visit dealerships and online marketplaces to 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 can 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 not, try to negotiate as close as possible to the remaining amount on your loan to minimize your losses.

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 you can send to your lender to pay off your trade-in.

Some dealers may handle the payoff for you. If they do, follow up to ensure the money gets where it’s supposed to go.

You can use any leftover cash as part of a down payment toward another vehicle. Next, compare current auto loan rates and start shopping for your next car.

Why vehicle equity matters

Often, it’s best to pay down or pay off your auto loan before selling it or trading it in. The main concern is whether you have positive or negative equity on your loan. With negative equity, you should pay off your auto loan before you trade in your car.

  • Positive equity: Positive equity on an auto loan means that you owe less on the car than it is worth. In this case, you don’t have to pay off your car loan in full before trading it in unless you want to. You will receive enough money from trading in to pay off the loan.
  • Negative equity: Negative equity is the opposite. If you trade in your car with negative equity, you may have to pay off the remaining loan balance out of pocket before trading it in. You could instead roll the negative equity into your new loan.

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

Moving forward with a trade-in when you have negative equity is typically a bad idea. You will be responsible for paying down your new loan on top of the amount left over from your previous loan. Essentially, you will pay for your new car and the one you just sold.

Lenders often let you “roll over” the negative equity by adding the owed amount to your new loan’s balance. Use a negative equity calculator to get a better idea of what your payments will look like. This allows you to see how your old loan affects your new one.

If your new car is inexpensive enough, there’s a chance your new payment will still be lower than your old one.

But as a general rule, avoid trading in a car with negative equity.

Alternatives to trading in your car

If you’re upside down on your loan, trading it in is unlikely to be the best course of action.

  • Sell it yourself: Opting for a private sale may be able to net you more money. Even if you have to get permission from your lender to sell, a private sale could mean more to put down on your next car.
  • Continue making payments: If your payments aren’t currently breaking the bank, set aside some extra money to break even. This way, trading your car in won’t involve rolling any remaining loan balance into your new auto loan.
  • Refinance current loan: Auto loan refinance rates may be lower than what you’re currently paying. This may reduce the total amount you pay in interest, and in turn, help you avoid negative equity on your loan.

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. Trading in your car for a less expensive option may be the right solution. If you do have negative equity, try refinancing instead — it may allow you to lower your interest rate so you pay less overall.

Most importantly, don’t roll your remaining loan into a new one if you can help it. Work with your lender, sell your car or find an alternative option to avoid taking on additional debt.