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How To Trade In A Car That Is Not Paid Off

Hanna Kielar7-minute read
UPDATED: December 13, 2022


Are you looking for a new car, but don’t know how your existing auto loan will affect trading in your vehicle? You may be wondering, “How does trading in a car work?” This guide covers how to trade in a car that is not paid off and what you need to know before completing the transaction. It’s simple to learn how trading in a car works and you can trade yours in with very little trouble even if you have a remaining balance on your loan.

Can You Trade In A Financed Car?

You can trade in your vehicle at any time, even if you have a loan on it. Trading in a car, however, is a slightly different process from selling and is usually easier. When you trade in the vehicle, you are simply selling the car to the same person, usually a car dealership, that is selling you a new car. Dealerships can make this process extremely easy and you can often drive off with a new car on the same day.

The goal should be to get a trade-in offer that’s greater than the payoff amount on your loan. You can use that money to pay off your current loan. With any cash left over, you can either apply it to the down payment on the new car, use it to pay down any other loan, or keep it as cash. If you don’t receive enough to cover the balance on the loan, you’re responsible for making up the difference. 

Understanding When You Should Trade In A Car You Still Owe On

While trading in a car you still owe on is always possible, making extra money on the deal is not always the case. You could trade in a car you just bought, but a new car’s value drops significantly right after purchase and will likely be worth less than what you owe on it. The best time to trade in your car is when you have enough equity in the vehicle to justify the trade. This is called having positive equity – meaning the car’s value to a buyer is more than what you still owe – and it can save you money on your new loan.

Negative equity is owing more money on your vehicle than it’s worth. You can still sell it, but you'll need to pay the difference between what you get for the car and what you owe so that the loan is satisfied. When you complete a trade like this, the balance is rolled into a new loan and you'll have to make payments on a larger principal.

To determine if it's the right time to trade in your vehicle, follow these steps:

Step 1: Calculate Your Equity

Calculating your equity is an important, but easy, step. Contact your lender to request a payoff amount so you’ll know how much you still owe on your loan. Then, research how much your car is worth to determine what you can expect to receive if you traded it in.

Trade-in value — Payoff loan amount = Equity


Person A has a car that’s worth $22,000 and their payoff amount is $15,000. It’s worth $7,000 more than the remaining balance on the loan, so they have $7,000 in positive equity. Person B also has a vehicle that's worth $22,000, but they have an outstanding loan balance of $25,000. They have negative equity of $3,000 that they'll need to cover when trading in the vehicle either by paying $3,000 out of pocket or rolling it into a new loan.

Step 2: Compare Preapproval Offers

When you get preapproved for a loan before walking into a dealer, it gives you leverage when working with the sales and finance team. If they don’t offer you similar terms, you can obtain financing elsewhere. Dealers are often incentivized to finance you through the lenders they work with, so they might find you a better deal to keep you from financing the car somewhere else. It’s important to know that this is a negotiation and you do not have to accept the dealer’s financing to complete the transaction.

Getting preapproved also tells you what you can afford so you can have a budget in mind when shopping. When you’re comparing vehicles within your budget, decide what kind of car you need and what features are most important. If you can live without some of the more expensive features, such as a navigation system or high-end wheels, you can save hundreds if not thousands of dollars. Keep an eye on any restrictions your preferred lender might have that limit the make, model or mileage of used cars they’re willing to finance.

Remember, your preapproval is valid for a certain period of time, usually 30-60 days. Be sure you’re ready to buy within that window so you don’t need to get another preapproval, which would require another hard credit inquiry and could impact your credit score.

Step 3: Negotiate Your Trade-In Transaction

Dealers are masterful at negotiation, especially on trade-ins, in part because the process can seem so simple. For example, a dealer can make a great offer on your trade-in but may then recoup the amount by increasing the price of your next car for sale or offering less-attractive financing terms. Not all dealerships are the same, so it’s important to do your research and work with reputable dealer partners. That's why when you're negotiating a trade-in and purchase through a dealer, it’s a good idea to separate the two transactions.

You could shop your vehicle with several dealers and get written offers to purchase it before attempting to trade it in. This gives you leverage because the dealer needs to match the best offer or come close enough to it to make the deal attractive. You should then negotiate the price of the car you’re buying separately to ensure you get the best deal possible.

Come prepared with trade-in offers from multiple places and arm yourself with research on the average sale price of the make and model you’re looking for around town. The more you know, the more likely you’ll be able to spot a great deal when it’s in front of you.

Other ways to increase the potential trade value of your vehicle include:

  • Taking your car in for a thorough detailing or doing it yourself so the interior is clean and presents well
  • Remove your personal items from the vehicle so it’s not cluttered
  • Make any needed minor repairs to the vehicle, such as fixing dents or scratches on the paint

Negative Equity

If you have negative equity in your vehicle, determine how much you owe beyond what a dealer is likely to pay for it. If it’s a significant amount, it’s probably best to wait a bit before looking for a new car. Provided the car is well maintained and does not have excessive mileage, negative equity usually dissipates over time. If you really want to purchase a new vehicle, you might consider taking out a personal loan to cover the difference between the remaining balance and the trade-in amount, rather than having the unpaid balance rolled into the new car loan. Be aware that personal loans often come with higher interest rates than auto loans.

Your credit can also be a factor in your decision. Sometimes, despite having negative equity, you can lower your monthly payment with a new loan if your credit has improved since you bought your current vehicle. With a stronger credit score, you may find you’re getting offers with significantly lower interest rates than when you last bought a car. As an alternative to making a new car purchase, you may want to refinance your car to lower your payment. 

Positive Equity

If you have positive equity in your vehicle, you can use it as a down payment for your new car. Doing so lowers the total cost of the loan, reduces the taxes you pay by reducing the sale price of your new car and gives you a lower monthly payment. Make sure that your trade-in amount is deducted before the dealership calculates sales taxes on the new car sale, so you don't pay tax on the new vehicle's full purchase price.

Also, review the paperwork to make sure that you’re not charged excessively for items such as the title processing, registration and documentation fees. Fees vary from state to state and while they can be tough to negotiate down, it’s important to ask questions so you know what you’re paying for. 

Step 4: Finalize The Transaction

When you're ready to finalize the transaction, review your loan and pay attention to the fine print. How is interest assessed? Are there any prepayment penalties if you decide to pay off the loan early? Since the dealer handles paying off your existing loan, you should also verify that it's been taken care of.

If you’re not happy with the trade-in offers you get, consider other ways to sell your car. To save money, you might decide to sell your car privately and pay off your loan before buying another vehicle. Remember that the dealer must turn around and sell your trade-in. They decide on the trade-in value knowing that they can make money when they resell the car. If you decide to sell privately, keep in mind that it can take up to 6 weeks to receive the title after paying off your loan, and you need the title to complete a car sale to a private party.

The Bottom Line: It’s Best To Trade In When You Have Positive Equity In Your Vehicle

While it may be tempting to trade in your car for a new one, you want to do so at the right time. You should avoid rolling debt into a new loan and try to trade your vehicle when you’ve got positive equity. It's also important to pay attention to the small print on your loan documents to make sure you’re getting the best deal.

Plus, trade-in values from a local dealer are typically based on what similar vehicles are selling for in your area. You may be able to save more money by getting an instant cash offer.

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.