If you’re looking to trade in a car that you’re still paying for, it’s easier if you have positive equity in the vehicle. This means that the car is worth more than you owe on your current loan. If your equity in the vehicle is negative, or you owe more on your loan than the car is worth, you're still able to trade the car in, but it will cost you more.

If you decide to do a trade-in, you’ll need to update your

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Is it possible to trade in a car that’s not paid off?

Yes. But before you hop, skip, or jump to the nearest car dealership, you’ll have to figure out whether you have positive or negative equity in your vehicle. Not to worry, this is a simple calculation that both mathletes and non-mathletes alike will be able to handle.

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How to trade in a car

Positive equity in your car

First, you’ll need to find the market value of the car you’re looking to trade in.

Go to trusted sources such as

Kelley Blue Book

Edmunds

, and

National Automobile Dealer Association Guides

to get a good estimate of how much your car is worth.

Say you’ve determined that your car is currently worth $15,000. Let’s also say you have a balance of $7000 remaining on your current loan for the same car.

Subtract what you owe on the loan from its estimated value, and you’ll get your equity. In this case, you’ve got $8000 in positive equity, which is a good thing—this is when you should trade your car in.

If you’re intent on trading your car in, the world truly is your oyster. The dealer can apply the positive equity you hold on your current loan towards the purchase of your new car.

Key Takeaway Before trading in a car you’re still paying for, calculate your equity in the vehicle by subtracting what you owe on your loan from the car’s estimated market value.

Negative equity in your car

You can still trade your car in if it has negative equity, but it will be more expensive.

In another scenario, let’s say you’ve determined your car’s value to be $7000, but you still owe a balance of $9000 on your car loan. In this case, you’re left with -$2000, or negative equity.

This scenario is very common.

Roll negative equity into your new car loan

Your first option to trade in a car with negative equity is to roll that equity into a loan for a new vehicle. This is easy to do, but it increases the overall value of the loan you’re taking on, and you may pay more interest on it.

Also, the negative equity rolled into your new loan puts you at risk of borrowing more than your new car is worth. This puts you in danger of going

upside down on your car loan

, especially if the car depreciates quickly.

Pay the difference between the trade-in value and your current loan balance

If you have some cash available, you can pay the difference between your current loan balance and what the dealer is offering you in a trade-in. Doing this will keep the overall value of your new loan lower.

Delay trade-in until you pay off your loan

Waiting to pay off your car loan before trading the car in has some benefits. If you pay off your current loan in full, you won’t have to worry about negative equity being tacked onto a new car loan. This is added insurance against going underwater on your new loan.

Key Takeaway You can trade in your car if you have negative equity, but it will be more costly.

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When can you trade in a car with a loan?

Technically, you can trade in your car anytime. You might want to wait at least a year, as new cars typically depreciate by as much as 20% in the first year of ownership.

Depending on how big of a down payment you put down and how quickly the car loses value, you could be upside down soon after you buy the car.

That’s why it can be smart to wait for at least a year before trading your car in. The car’s rate of depreciation will have slowed down, allowing you to "catch up" and shrink the negative equity as you make your monthly loan payments.

MORE:

How to buy your first car

How to trade in a car with a loan

First, research your current car’s market value. This will help you gauge what a dealer might offer you when attempting to trade your car in.

Next, calculate whether you have positive or negative equity in your vehicle. Remember, subtract the amount you owe on your loan from its estimated market value. You’ve got this!

Shop around for trade-in offers and negotiate

Make sure you shop around for the best trade-in offers instead of falling into the waiting arms of the first car dealer you encounter. With your car’s estimated market value safe in your head, you’ll be able to sniff out any lowball offers coming your way.

It’s a good idea to keep trade-in negotiations and talks for a new car separate. You don’t want a dealer upping a car’s sale price to compensate for a high trade-in offer.

If you’re rolling negative equity into a new car loan, be sure you have all the information you need before signing. That means being clear-eyed about the new loan amount, the interest rate, the new loan’s term, and how much you’ll be making in monthly payments.

Seal the deal

If you’re happy with your trade-in’s value and have agreed on your new car’s price, closely read the sales contract before you sign it. Double-check your new loan’s amount, its term, the interest rate, and the amount you’ll be paying each month.

However the dealer agrees to handle your negative equity from the previous loan — make sure it's included in the contract.

Last resort — sell in a private sale

If trading in doesn’t work, you can try selling the car privately. Be sure to check with the lender that this is okay.

You may get more from a private sale than from a trade-in. You can then use this money to pay down the remaining balance on your loan.

Make the trade for better car insurance

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