How to Trade In a Car That Is Not Paid Off

Yes, you can trade in a car that is not paid off. But if you owe more than your car is worth, it can be costly to do so.

If you’re trading in a car you still owe money on, one of the following two situations apply:

• You have positive equity. If your car is worth more than the amount you owe on your loan, you’re in good shape. This difference is called positive equity and it’s like having money that you can apply toward the purchase of a new car.

• You have negative equity. If your car is worth less than what you still owe, you have a negative equity car also known as being “upside-down” or “underwater” on your car loan. When trading in a car with negative equity, you’ll have to pay the difference between the loan balance and the trade-in value. You can pay it with cash. Or you could roll what you owe into a new car loan, but this option isn't recommended.

Your state of equity will determine what steps to take to trade in your car and what to keep in mind while you do.

Find out how much your car is worth

When you trade in a car that's paid off, its value is subtracted from the price of the new car. When you trade in a car with a loan, however, the dealer takes over the loan and pays it off.

If you plan to trade in a car you still owe money on, the first step is contacting your auto loan lender and asking for your payoff amount, or how much you owe on your loan. This figure could be slightly higher than your remaining balance because it includes all of the owed interest.

Next, determine the current trade-in value of your car with a pricing guide. You can use online pricing guides like Kelley Blue Book and Edmunds. Then, subtract the payoff amount from your car’s current trade-in value to have a sense of whether you have positive or negative equity in your current vehicle. However, the final trade-in price is negotiable.

Trading in a car with positive equity

Say you owe $5,000 on your car, and it’s worth $7,000 as a trade-in. You now have $2,000 of equity you can apply directly to the purchase of your next car.

This equity is deducted from the negotiated price of your next car. In addition to any equity applied to the car purchase, you can make a down payment with any saved or additional cash you have to reduce the overall balance of the loan.

But you’ll need to provide financing — cash or an auto loan — for the remaining purchase price of the car. The value of the trade-in will be listed in the contract for your new car. Make sure you are given the full agreed-upon amount you negotiated.

» MORE: Compare auto loans, rates and lenders

Trading in a car with negative equity

If you’re upside-down on your car loan, you’re responsible for paying the difference between how much you owe and how much the car is worth. Depending on how much you owe, this can be costly. But there are some alternative options to consider:

Postpone the trade-in: If you don’t need a new car urgently, it might make sense to postpone your new car purchase and trade-in until you pay off the loan — or at least until you have positive equity.

Roll over the negative equity: If you owe more than your car is worth, your dealer might suggest rolling the negative equity into the loan for your next car. Though convenient, this is often unwise because it will immediately make you upside-down in the new loan. It also means that you’re creating a larger loan amount and paying more interest.

However, if you need a car but don’t have the money to pay off the negative equity and are having trouble keeping up with your current car payments, trading in your vehicle can provide relief by allowing you to downsize to a less expensive car with a lower interest rate. This option can make your payments more manageable.

In such a case, you’ll need to give the dealer your trade-in, plus the amount of the negative equity. For example, if you owe $10,000 on a car with a trade-in value of $9,000, instead of being on the hook for the whole $10,000, the trade-in credit will cover most of the loan and you’ll pay the dealer the $1,000 difference.

» MORE: Does a trade-in reduce sales tax?

Final steps

Note that both the price of the car and the value of the trade-in are highly negotiable. The best way to ensure that you get a good price for your trade-in and your new car is to negotiate the trade-in and car purchase separately.

To get an overall good deal, you’ll need to get a good interest rate on your new loan and a fair price for both the trade-in and the new car. Before you go to the dealership, use a car loan calculator to estimate these numbers and see what your new monthly car payment will be.

Once you’re done negotiating your car deal, along with the trade-in, review the contract carefully to make sure all the terms you agreed on are in writing. Double-check the numbers with your own calculator.