Trading in a Car That's Not Paid Off

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Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - July 13, 2018

Many people look to trade in their vehicle before it's paid off, whether they're bored with it, want something smaller or bigger, or need a more or less expensive car. It's a situation that's all too familiar to dealers. While trading in a vehicle that's not paid off isn't a problem if you have equity, it's a different story if you're upside down in the loan.

Trading in a Car with Equity vs. Negative Equity

The difference between the actual cash value of your car and how much you owe on it is called equity. If you still owe $2,000 on your auto loan, but your vehicle is worth $6,000, you have $4,000 worth of equity.

In situations like this, trading in a car that's not paid off is a breeze. The dealership will take your trade-in, pay off the lender to remove the lien, and then the vehicle is theirs to resell on their lot or at auction. This is the most ideal trade-in scenario because not only will the dealership take care of all of this, but you can use the equity as a down payment on your next car. Of course, you could also pocket the equity and finance the entire amount of your next vehicle.

Having a trade-in to use as a down payment is a great way to save money on your next loan. By applying any equity, you reduce the amount you have to finance, which leads to smaller monthly payments and a lower overall cost because you reduce the interest charges you end up paying.

At the other end of the spectrum, negative equity is when your loan balance is higher than the value of your car. Having negative equity, also referred to as being underwater or upside down, throws a wrench into the trade-in process. If we flipped our example from above, and you owed $6,000 on your loan while the dealership is only offering $4,000 for your trade-in, you're now responsible for the $2,000 of negative equity.

Dealing with Negative Equity when Trading in a Car

Negative equity is something that many car buyers experience, but they may not even notice they have it unless they try to trade in their vehicle. Being upside down isn't an issue if you plan on keeping your car until you have equity in it or it's paid off.

If you're trying to trade in a vehicle with negative equity, there are three main options available to you:

  • Cover the negative equity out of pocket – You can pay the difference between what you owe and what your car is worth. This eliminates the negative equity so you can go ahead and finance your next vehicle like it was never there.
  • Wait until your equity situation improves – If you're unable to come up with the difference, you may have to wait until you have paid on your loan to the point where you have equity.
  • Roll the negative equity into the new loan – A final option that's available to some buyers is rolling over the negative equity into the new loan. This increases the size of the loan, which means higher monthly payments and increased interest charges. It also means that you instantly have even more negative equity in the new vehicle, so it can create a cycle that's hard to get out of. For these reasons, it's best to explore your other options before settling on rolling it over.

Rolling over negative equity isn't an option for all car buyers – it can depend on how much you owe and your credit situation. Lenders typically don’t like to finance more than a vehicle’s price, so this may be unavailable to those who owe a lot and/or have bad credit.

How to Trade in a Car That's Not Paid Off

If you want to trade in a car that you still owe on, there are some steps you should take before heading to a dealership:

  • Know the payoff amount of your loan. This can be obtained by contacting your current lender.
  • Get an estimate for what your trade-in is worth. You can use vehicle valuation tools online, or have it appraised at a used car dealership or a place like CarMax.
  • Calculate your equity situation. You'll be better equipped to handle what's next by calculating the difference between what you owe on your loan and what your car is worth.

After this, you can visit a dealership and discuss your situation and options. If you're looking for a dealer that can help you get financed even with less than perfect credit, let CarsDirect help you get connected to one.

We work with dealerships across the country that are trained in special financing. We'll work to match you with one in your area if you fill out our free and easy auto loan request form online.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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