How to Trade In a Car That Is Not Paid Off

• You can trade in a car even if it's not paid off. Dealerships handle the loan payoff, but if the loan amount exceeds the trade-in value, you must cover the difference.
• Positive equity (car value higher than the loan balance) is beneficial, allowing you to use excess funds as a down payment or cash back. Negative equity (owing more than the car's worth) requires additional payment to close the loan.
• If trade-in conditions are unfavorable, continue making payments to reduce your loan balance, explore private sales for potentially higher returns, consider refinancing for better terms, or opt for car subscription services like FINN for flexibility.

You can trade in a car with an existing loan if you find a dealership willing to negotiate a trade-in offer. When you trade in a vehicle to a dealership, the dealer will handle closing out the loan on your behalf. 

If you owe less than the trade-in offer, you can use the difference as a down payment on a new purchase or receive the funds back in cash. However, if you owe more than the dealer offers, you must furnish the funds necessary to pay off the difference to seal the deal. 

Once you’ve handed the keys to the dealer, the finance department will work with your lender to resolve the remaining amount of the loan balance and transfer the title. Although vehicle ownership transfers to the dealership once you sign the trade-in agreement, it’s a good idea to follow up on the loan payoff process. You remain responsible for any upcoming loan payments until the lender learns otherwise, and it can take some time for the dealership to complete their end of the transaction. 

What to do if you have negative equity

Negative equity translates to owing more on your car loan than the dealership offers you. For instance, if your outstanding loan balance is $8,000 and the dealership’s highest trade-in offer is $6,000, you’d have a negative equity of $2,000. Ideally, making a profit on trading in your vehicle can help boost your finances going into another car loan. Paying the dealership to take the car off your hands instead can feel like getting the raw end of the deal. 

However, you can also look at the deal from the perspective of exiting your existing car loan for only $2,000 instead of $8,000. If that makes more sense financially—and based on the vehicle's condition—you can still use those circumstances to your advantage. One scenario in which this might apply includes trading in a two-wheel or front-wheel drive car for an all-wheel or four-wheel drive vehicle if you’ve moved to a snowier climate. 

What to do if you have positive equity

It makes more financial sense to trade in your current car if you have positive equity, especially if you’re financing your next vehicle purchase. If your existing loan balance is $5,000 but the dealership offers you $7,500, you would have $2,500 in positive equity. You could put this down on the financed loan amount or use it to pay taxes or fees incorporated into a vehicle sale. Alternatively, you can request the equity in cash and add it to your emergency fund if you already have stellar financing terms. 

Figuring out how to trade in a car with an existing loan requires the following steps. 

1. Determine your loan payoff amount

Several numbers factor into your decision to trade in the car you still owe money on, including your loan payoff amount. Keep in mind that the loan payoff amount includes additional fees not always represented in your remaining balance. It’s critical to request a loan payoff quote from your lender instead of assuming the loan balance on your account represents the final bill. 

2. Find the fair market value of your car

Now that you’ve got a basis set, it’s time to shop your car around to see what offers you can get for it. Kelley Blue Book, Edmunds, and several other automotive marketplace websites will send you offers—typically in a range—for your vehicle once you enter some information. Honest and accurate information will get you closest to your current vehicle’s actual fair market value in its present condition.

3. Review your finances

Compare the offers you received to the loan payoff amount you requested from your lender. If the offers are lower than what you owe, calculate the exact difference. Offers higher than your loan payoff aren’t always a green light to go ahead with a trade-in, but they can work in your favor. Ask yourself how much you want to spend on a new vehicle and how your best trade-in offer factor into that decision.

4. Prepare your car and shop offers 

If you decide to proceed with the trade-in, it’s time to spiff up your ride and do any minor repairs contributing to your car’s trade-in value. Ensure the money you put into the vehicle remains relative to the expected profit. Major repairs or anything over a few hundred dollars can easily cross that line by providing little to no return on investment (and at that point, you may reconsider keeping the vehicle). 

5. Negotiate and close the deal . . .

When you’re ready to accept an offer, attempt to negotiate the value of your trade-in separate from the new car purchase. While you can’t necessarily change how much you owe on the existing loan, you can (attempt to) negotiate for a higher offer from the dealer. Obtain written confirmation from the dealership and the lender that your loan has been fulfilled. Read any sales contracts carefully to ensure the numbers match what you negotiated.

. . . Or wait on the new car purchase

If you have substantial negative equity or can’t find a high enough offer to make the transaction worthwhile and financially savvy, waiting on buying a new car might be your best option. You should also consider waiting on a car purchase if you’re unsure of your financial situation for several months to a year. Finding the right time to move on a car from a financial perspective may not always align with your desire to own a new car, but delaying your timeline for even a short amount of time could help you realize more favorable offers or conditions. 

Ultimately, the choice to trade in a car that’s not paid off depends on your financial situation and risk appetite. If you have positive equity and are financially stable enough to ease the transition, work the numbers in your favor and make the exchange. However, carefully consider your options if your negative equity presents a barrier to owning a new car. You may want to research how to pay off a car loan faster before taking the plunge on a new car loan. 

Waiting to purchase a car can also give you time to build your credit score or test-drive other cars to narrow your options. With a FINN car subscription, you can test-drive several makes and models for six months up to two years. FINN makes budgeting for car ownership easy with a single monthly subscription fee that incorporates registration, insurance, depreciation, and maintenance. FINN also comes with no hidden fees and reasonable credit score requirements for which many potential buyers can qualify. 

If you’re not ready to trade in your car or circumstances aren’t working in your favor, you have several options: 

• Continue making car payments: Forging ahead with your payments may seem mundane, but it can help you get closer to positive equity and owning your vehicle outright. 
• Consider a private sale: You can typically get more for your vehicle by selling it privately than trading it in at a dealership, but exceptions exist. Private sales also often take longer to arrange. 
• Refinance your current auto loan: If you’re struggling with monthly payments, refinancing can help extend your loan terms and ease the strain on your budget. However, refinancing fees and the potential for similar or higher interest rates can deter borrowers from exercising this option. 
• Subscribe to FINN: Car subscriptions from FINN make car ownership simple. Your monthly subscription fee incorporates many of the expenses associated with owning a vehicle, and you get to pick from an extensive fleet of vehicles of many popular makes and models. FINN also delivers your subscription right to you for the ultimate convenience.

Choosing your next move can be tricky if you’re not ready or financially prepared to trade in your car. However, the alternatives may put you further ahead than what appears at first glance. Subscribe to FINN to test-drive a few models you’ve considered without a long-term commitment, and your preferences may change.