Trading in a Car That’s Not Paid Off: What You Need to Know

a woman works with a salesman at the dealership on a deal to trade in her car that's not paid off

Sometimes, a new car just can’t wait. Maybe your old car isn’t reliable enough anymore. Maybe you need more room for tools for a new job, or perhaps a new family member has arrived. 

But what if you still owe money on your car loan? Can you trade in a car if it’s not paid off? The answer is yes – except you need to be careful. Read on to find out about positive and negative equity and how that can affect your trade-in.

Can I Trade in a Car That’s Not Paid Off? 

The short answer is, yes, you can trade in your car even if you still owe money on it. But it’s worth running the numbers first to make sure you don’t put yourself in a tight spot. 

Here are a few questions you should be able to answer before you take the next steps:

  • How much do you owe on your existing auto loan?
  • How much is your current car worth right now and what are you likely to get for it when you trade it in?
  • How much is the car you want to buy?
  • Do you have any down payment saved up, which could reduce the amount you need to borrow?

What Is Positive and Negative Equity?

Equity is the difference in value between what your car is worth and what you owe on your loan. Equity can be positive or negative and it’s a very important factor to consider before you trade in a car that’s not paid off.

  • Positive equity. The value of your car minus what you owe on it. For example, if your car is worth $20,000 and you owe $15,000, then you have positive equity of $5,000.
  • Negative equity. When you owe more than the car is worth. For example, if your car is worth $10,000 and you owe $15,000, then you have negative equity of $5,000.

So if you owe $15,000 on your car and a dealership gives you $10,000 when you trade it in, you’ll be able to pay off $10,000 of your loan but you’ll still owe $5,000.

Can I Roll Negative Equity Into My New Car Loan?

Yes, you can trade in a car with negative equity. All you need to do is get a new car loan that will cover the cost of your next car plus the negative equity on your old car loan. But, the problem is, this will likely leave you upside down on your loan. 

Being upside down or underwater on your car loan means you owe more than the car is worth – and that’s not a great starting point for a new loan.

Here’s how it works:

  • Let’s say you have $5,000 negative equity on your old car loan.
  • You want to buy a car that is currently worth $20,000.
  • You don’t have a downpayment so you need to borrow $20,000 plus $5,000, which equals a loan of $25,000 (plus any other fees).
  • This is $5,000 above what your new car is worth – so you’re immediately upside down. 
  • Plus, cars tend to depreciate or lose value over time. Soon, your car might be worth $18,000 and you might still owe $23,000.
  • If your car depreciates faster than you can pay it off, you might never get on top of your loan.

3 Tips for Trading in a Car That’s Not Paid Off

Luckily, there are a few things you can do to give yourself the best chance of reaching a healthy financial position before you trade in your car. 

  1. Pay off as much of your old car loan as possible by trimming other expenses, exploring other sources of income, and making a lump sum payment (like from your tax return).
  2. Get your credit in good shape so you’ll get a better APR on your new car loan. This means more of your payment will go toward the principal and less towards interest.
  3. Shop for a car at a reasonable price point so your monthly payment will be affordable while you pay down the negative equity and the new loan balance.

Next Steps: Applying for a New Car Loan

If you’ve decided you just can’t wait to get a new car, then it’s time to think about finding the right lender for your car loan. The loan application process will be the same as before, except this time you might have negative equity to consider. 

It’s a good idea to make sure your finances are in the best shape possible and saving up for a down payment is a great way to prove your creditworthiness. A down payment may even get you a lower rate! Click below to find out more.

How Big Should the Down Payment on My Car Loan Be?