How to Trade in a Financed Car: Here’s What You Should Know

woman smiling while sitting in a car

Trading in a financed car means trading in a car that you're still paying off. Dealers will be happy to work with you on it and do most of the legwork, but you should be well-armed with information before you start the process.

What You Need to Know About Trading In a Financed Car

When you trade in a vehicle you still owe money on, the dealer takes over the loan and pays it off on your behalf. They also typically handle the process of transferring the title.

If the trade-in value of the vehicle is higher than the amount you still owe on the loan, this means you have positive equity, and that value will help reduce the cost of the car you're buying.

For example, let's say you're buying a car for $10,000. If your trade-in is worth $5,000 and you still owe $2,000 on it, the dealer pays off the loan, and your $3,000 in equity reduces the cost of the new car to $7,000.

However, if you owe more than what the car is worth in a trade-in, this means you have negative equity. The dealer still pays off your original loan, but they'll require you to pay them the difference in cash, or they'll offer to roll the difference into your new loan.

Taking the original example, if your trade-in value is $1,000 and you still owe $2,000, you'd need to come up with $1,000 in cash for the dealer or allow them to add that to your new loan.

As you consider your options, here are some pieces of information you'll want to know:

  • The trade-in value of your vehicle: You can estimate this using websites such as NADAGuides and Kelley Blue Book. Note that they'll provide you with a value range, so there's room for negotiation at the dealership.
  • How much you owe: Log in to your online account with your lender to find out how much you still owe and compare it to your car's trade-in value. Note that you'll need to look at the payoff amount, which includes interest that's accrued since your last payment.
  • Your budget: Once you know whether you have positive or negative equity, think about how much you want to spend on the new vehicle. If possible, avoid a situation where you roll negative equity into a new loan because it can put you into more debt. Also, consider the interest rate and monthly payment on the new car loan to determine whether they fit in your budget.
  • Your loan options: You'll have a couple of options when financing a car purchase. First, you can allow the dealer to take care of it. They'll submit your credit application to multiple lenders and provide you with options. Keep in mind, though, that dealers may take a cut for arranging the financing, which can increase your interest rate. The other option is to get direct financing by contacting lenders on your own. It requires you to do more work, but it can save you some money.

Also, keep in mind that you can generally get a better price by selling your car in a private-party transaction, but this can be a lengthy process. If you'd like to proceed with a trade-in for the sake of convenience, keep reading.

How to Trade In a Financed Car

If you've decided to trade in your vehicle, here are some steps to maximize your savings:

  • Be prepared to negotiate. As previously mentioned, there's no set value for every make and model. Instead, you'll be given a range of values based on the car's condition and other factors such as mileage and the age of the car. Knowing that range ahead of time can help you negotiate a good price with the dealer. If they're not willing to negotiate, try a different dealer. In fact, shopping your car around could help you maximize the value of your trade-in.
  • Prepare your car to trade in. Take some time to get your car cleaned up and to take care of minor repairs. You don't necessarily have to pay to get it detailed, but that can help if you don't have the time or materials. Taking care of smaller repairs can also help. Since the dealer won't have to do it themselves, they will likely knock off more cash than you'd pay for the repairs.
  • Gather your paperwork, including maintenance records. Get your car's 10-day payoff letter from your lender. You can typically find it online or by calling customer service. You'll also want to bring your vehicle registration, proof of insurance and any proof of recent maintenance and repairs.
  • Use your equity. If you owe less than the car's trade-in value, you can use that equity as your down payment for the new vehicle. Alternatively, you could request to get the difference in cash and use the money however you want. But if a lower monthly payment would be better for your budget, use it to reduce the cost of the new vehicle.
  • Wait on the purchase. If you owe more than your car is worth, consider waiting to buy a new car until you can pay off the original loan on your own or pay the dealer the difference in cash. Rolling that difference into the new loan could put more pressure on your budget and cause more problems down the road.
  • Get written confirmation of the payoff. The dealer typically takes care of the process of paying off your old loan when you buy a car with a financed trade-in. It's a good idea to notify your lender, though, especially if you have a payment coming up soon. More importantly, make sure you get written confirmation from both the dealer and the lender that your old loan has been paid in full. The last thing you want is a surprise bill because the dealer took too long to pay off the loan.

Pros and Cons of Trading In a Financed Car

Depending on your situation, there can be both benefits and drawbacks of trading in your financed vehicle and buying a new one. Here's what to consider:


  • You can purchase a cheaper vehicle and cut your monthly payment.
  • You may be able to get better loan terms on the new vehicle.
  • If you have positive equity, you can use that to drive down the cost of the new car.


  • Trading in a financed vehicle for a car with a higher monthly payment could negatively impact your budget.
  • If you have negative equity, you may be on the hook for a large cash payment on your new loan.

The Bottom Line

While the process seems simple on the surface, it can get complicated, especially if you owe more than it's worth. If you still owe money on your car, consider whether it's too early to trade it in to buy a new vehicle.

Additionally, it's important to prepare your finances and your credit for the new vehicle purchase. Check your credit score and credit report for free with Experian to get an idea of where you stand and determine if you need to take action to improve your credit before you proceed. Making improvements on your credit can help you qualify for better interest rates and payment terms.