How to Trade in a Car That Is Not Paid Off

If you are in the market for a new car but still owe money on your current one, then you might be wondering how to trade in a car that is not paid off. One key factor is whether the value of your car is higher than the outstanding balance on your loan. Here’s what you need to know.

How to Find Out What Your Trade-in Is Worth

If you are planning to trade your car in, then it’s important to know how much it’s worth before you go to the dealership. Without that information, you might accept a lowball offer from the dealer without realizing it.

You can research your car’s value online by using the Kelley Blue Book or other valuation guides. It’s a good idea to consult several such guides, because they calculate value differently and often arrive at different numbers.

Bear in mind that you’ll almost never get as much from a trade-in as you would if you sold the car privately. But knowing roughly how much your car is worth can keep you from being taken advantage of.

Trading in a Car with Positive Equity

If your car is worth more than you owe on the loan, then you’re in a relatively straightforward situation. For example, say the dealer offers you $13,000 for your car and you still owe $11,000 on your loan. When you trade in your car, you’ll get the difference ($2,000), which represents your equity in the car. 

If you’re financing your new car, then you can use your equity in the old one toward your down payment. That can be a way to lower the total cost of your new loan. You can add more money to it if you want to make a larger down payment and borrow even less. If you’re paying cash for the car, then the dealer can subtract your trade-in from the total price that you pay.

Trading in a Car with Negative Equity

If you owe more on your current loan than you can get for your trade-in, then you’re in negative equity territory. That’s often the case if you’re trying to trade in a relatively new car, given that cars depreciate rapidly in their first few years of ownership. Once you’ve had your car for a certain length of time, depreciation will slow and your loan payments will gradually catch up. So if you have negative equity in your car, then you might consider waiting to trade it in until your outstanding loan balance no longer exceeds your car’s value.

Otherwise, you’ll need to make up the difference. Your dealer may offer to include that amount in your new loan, but be careful. Doing so will mean that you’ll start your new loan with even more negative equity. So you might find yourself in the same situation a few years down the road when you go to trade in that car.

Can You Trade in a Leased Car?

It is possible to trade in a car that you’re currently leasing, and it works in a similar fashion to trading in one with an outstanding loan balance. You’ll first need to contact the leasing company, or check your leasing statement, to see what the car’s payoff or buyout value is. That’s the amount you would have to pay if you wanted to buy the car outright before the end of the lease. You’ll also want to find out if there is an early termination fee on your lease.

Once you have that information, you can contact the dealership where you’re buying your new car and have it work directly with the leasing company. Because there are often early termination or other fees involved in paying off a lease, you may not get the full amount of your trade-in with a leased car. So, as with trading in a car with negative equity, it could make sense to wait until your lease is over and exercise the purchase option.

At that point, of course, you don’t have to buy the car at all but can simply turn it in and walk away. And unless you plan to drive that car for some length of time before you trade it in—or a car dealer is willing to pay you more for it than the purchase option costs you—that could be a smarter move from a financial standpoint.

The Bottom Line

If your car’s trade-in value is more than your current loan balance, then you’re all set—you can just pay off the old loan and apply the difference toward the cost of your new vehicle. But if you owe more on your car than its trade-in value, then you’ll have to make up the difference. In that case, it may be a better financial move to wait until you’ve paid down your loan a bit more.