How to Trade in Your Car When You Owe Money on It

Trading in a car you haven’t paid off takes a few extra steps — including knowing all the numbers in the deal.

Philip ReedFebruary 27, 2020

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Yes, you can trade in a car with a loan. But proceed with caution and make sure you — not the dealer — control the transaction.

If you’re trading in a car you still owe money on, you’re looking at one of these two situations:

  • 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, another loan or — and this isn't recommended — rolling what you owe into a new car loan.

We’ll show you how to handle each of these situations. But first, a little background.

How trading in a car works

When you trade in your car to a dealership, its value is subtracted from the price of the new car.

When you trade in a car with a loan, the dealer takes over the loan and pays it off. The dealer is also supposed to handle the paperwork, such as the transfer of the title, which establishes legal ownership of the vehicle.

To trade in a car that’s not paid off, bring the following items to the dealership:

  • Loan information, including payoff amount and account number.

  • Driver’s license.

  • Vehicle registration.

  • Your vehicle keys and any remotes.

  • Proof of insurance.

  • A printout of your trade-in value.

It’s important to keep in mind that both the price of the new car and the value of the trade-in are highly negotiable. 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.

Payoff amount and trade-in price

If you plan to trade in a car you still owe money on, first contact your auto loan lender and ask for your payoff amount (which could be slightly higher than your remaining balance).

Price your car. Look up the current trade-in value of your car on a pricing guide.

You can use NerdWallet’s car value estimator, which uses pricing data from the National Automobile Dealers Association, as well as online pricing guides like Kelley Blue Book and Edmunds.

Compare values. Subtract the payoff amount from your car’s current trade-in value.

Though the final trade-in price is negotiable, you’ll now have a sense of whether you have positive or negative equity in your current vehicle.

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 the new car. In addition to any equity applied to the new car purchase, you can make a down payment 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.

The best way to ensure that you get a good price for your trade-in and on your new car is to negotiate each one separately. Refer to the prices listed in the online guides during your negotiations.

Trading in a car with negative equity

If you’re upside-down on your car loan, it’s really better to postpone your new car purchase and trade-in until you pay off the loan — or at least until you have positive equity. But if you’re struggling to make car payments, trading in your vehicle can provide relief by allowing you to downsize to a less expensive car or even an inexpensive used car. In such a case, you’ll need to give the dealer your trade-in, plus the amount of the negative equity.

Say 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.

Beware: the dealer will often happily suggest rolling the negative equity into the loan for your next car. Though convenient, this is 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, it might be worth the risk. This can be the case if your new loan — from either an independent lender or the dealer — has a lower interest rate. If you decide to downsize by purchasing a cheaper car, your payments may become more manageable even if you roll the remaining debt into the new car loan.

As you set up your new loan, avoid extending your loan term for more than 60 months for a new car or 36 months for a used one. Also, know that you would likely get a better price selling your car privately than trading it in.

Final steps

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.

Then, a few weeks after you’ve completed the deal, check that your loan is paid off. The lender should also send documentation in the mail that the loan is settled.

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