Yes, you can trade in a car you still owe money on, a situation known as having an auto loan balance. The process is common but requires managing the difference between your car's trade-in value and the remaining loan payoff amount. This difference is called negative equity if the loan balance is higher than the trade-in value.
The dealership you're trading the car to will typically handle the transaction. They pay off the existing loan directly with your lender and apply the trade-in value toward your new vehicle purchase. If your car is worth more than you owe (positive equity), that money acts as a down payment. The critical factor is the loan-to-value ratio on your new auto loan, which lenders use to assess risk.
| Scenario | Trade-in Value | Loan Payoff Amount | Equity | Impact on New Car Purchase |
|---|
| Positive Equity | $18,000 | $15,000 | +$3,000 | $3,000 is applied as a down payment. |
| Break-Even | $16,500 | $16,500 | $0 | No down payment from the trade-in. |
| Negative Equity ($2k) | $14,000 | $16,000 | -$2,000 | The $2,000 is typically rolled into the new loan. |
| Negative Equity ($7k) | $9,000 | $16,000 | -$7,000 | Lenders may reject this; requires a large down payment. |
Rolling over a small amount of negative equity is possible, but it increases the loan amount for your new car, potentially leading to higher monthly payments and a longer period of being "upside-down" on the loan. For larger sums, most lenders will require you to cover the difference with a cash down payment. Before visiting the dealership, contact your lender to get the 10-day payoff amount—the exact sum to settle the loan—and research your car's current trade-in value using resources like Kelley Blue Book (KBB) or Edmunds. This preparation ensures you negotiate from an informed position.
