Used Cars in New Jersey

Can you Trade in a Financed Car? Step-by-Step Guide

Auto loan debt is the second-largest category of consumer debt, right behind mortgages. In fact, nearly 80 percent of new cars in the United States in 2023 were bought using some form of financing. Americans are also taking longer to pay off their auto loans, with the average loan term for new cars being 67.9 months.

Given the high percentage of car financing and the long loan terms, it’s natural that many owners will end up trading their cars before their loans are fully paid off.

Yes, trading in a financed car is possible, and dealers are usually happy to help and do most of the legwork for you. However, it’s important to be well-informed before you start the process. In this article, we’ve explained everything you need to know in depth.

Can You Trade in a Financed Car?

Yes, you can trade in a car that has a pending loan. 

Here’s what happens. 

As you might know, the bank that financed your car has a lien on it. This means you don’t have a clear title until you pay off the loan, so you can’t just sell or trade the car outright.

When you decide to trade in a car at a dealership, and you still owe money on it, the dealer typically takes care of paying off the remaining loan to clear the lien. They’ll subtract this amount from the trade-in value of your vehicle.

The dealership also handles all the paperwork, making the process fairly hassle-free for you. However, there are some important things to keep in mind before you proceed.

Simply put, when you’re trading in a car with an outstanding loan, you’ll generally find yourself in one of two scenarios:

Positive Equity

If you owe less on your loan that what the dealership has agreed to pay for your car, you have positive equity. This is a good situation to be in.

Positive equity means that after clearing your existing loan, the extra balance gets applied as a credit towards your next loan. This remaining balance acts like a down payment for your new vehicle, leading to smaller monthly payments.

Imagine you’re buying a car for $20,000. If your trade-in car is worth $8,000, but you still owe $4,000 on it, here’s what happens: the dealer pays off your loan, and the bank clears the lien from the title. This frees up your car to be sold. The dealer then gives you the remaining $4,000 ($8,000 minus $4,000) in equity, which reduces the cost of your new car to $16,000 ($20,000 minus $4,000).

Negative Equity

Now, let’s talk about the opposite scenario, called negative equity. This situation arises when the value of your car is lower than the amount you still owe on your loan. It’s often referred to as being “upside-down” or “underwater” on your car loan.

If your trade-in value isn’t enough to cover the remaining loan balance, you have two options. You can either pay the difference in cash or roll the remaining amount into a new car loan.

For example, if your car’s trade-in value is $4,000, but you still owe $6,000, you’d either have to come up with $2,000 in cash or allow the dealer to roll that $2,000 into your new loan.

Being in negative equity can be tricky, so there are some important things you need to consider, which we’ll discuss further in the article.

9-Step Process to Trade in a Car with Pending Loan

Trading in a financed car works similarly to trading in a car you own outright, but you need to consider your current loan. Here’s how to do it step by step:

1. Find your Loan Payoff Amount

The initial step in preparing to trade in a financed car is determining your loan payoff amount, which essentially indicates the remaining balance on your car loan

It’s pretty simple to do this. You just need to contact your lender and get the exact payoff amount. This figure might slightly differ from what’s listed on your statement or coupon book due to factors like interest calculations, outstanding late fees, or additional charges.

Ensure you have your car loan account number and other pertinent details on hand when reaching out to your lender. 

Additionally, it’s worth noting that certain lenders may impose prepayment penalties if you settle your car loan ahead of schedule, so it’s wise to verify this aspect as well.

2. Estimate your Trade-In Value

The next step is to figure out how much your car is worth as a trade-in. You can easily do this using our ‘value your trade’ calculator.

We’ve teamed up with Kelley Blue Book, one of the most trusted names in the automotive industry, to give you a competitive value for your car. And here’s the best part—it’s completely free, and there’s no pressure to accept the offer.

To get started, just enter your VIN or License Plate Number and provide some details about your car.

3. Determine your Equity

Once you have an estimated offer, you can assess whether you have positive or negative equity in your current vehicle. Just subtract the loan payoff amount from your car’s current trade-in value. 

If the value of your car is higher than the remaining auto loan balance, you’re in a favorable position and can confidently proceed with your trade-in.

However, if you find yourself in negative equity, it’s not an ideal situation. If the difference is just a few hundred dollars, it might not be a major concern. But if you’re facing a shortfall of several thousand dollars, it’s worth reconsidering your decision.

We have talked about it in detail later in this article, you can move to that section directly.

4. Determine your Budget and Shop for Cars

Whether you’re in the market for a new or used car, it’s important to find a few options that suit both your lifestyle and budget.

We’ve compiled all the essential factors you need to consider to determine exactly how much you can afford – How Much Car Can I Afford?

If the reason for trading in your current vehicle is high monthly payments, it’s wise to consider a more affordable option. We highly recommend exploring used cars, as they not only offer better value but also tend to be easier on the wallet.

If you’re in or around New Jersey, Schumacher Used offers a wide selection of high-quality used vehicles. As an authorized dealer serving New Jersey for over 100 years, we take pride in providing reliable options for our customers.

Not only can you conveniently browse our extensive inventory of used cars, but you can also estimate your payments online. Additionally, we offer top dollar for used cars, so feel free to reach out to our staff for a personalized offer on your current vehicle.

5. Prepare your Vehicle for Trading in

Now that you have decided to trade in your financed car at a dealership, it’s time to actually get ready for the process. One of the things you would actually should be doing is to actually work on your vehicle to increase its trade in value.

First things first, focus on improving the appearance of your vehicle. This involves taking the time to give it a thorough cleaning and addressing any minor repairs. You don’t necessarily have to shell out for a professional detailing service, but it can certainly be worth it if you’re short on time or lack the necessary materials. Handling minor repairs yourself can also pay off, as it saves the dealer the hassle and they’re likely to offer you more in return.

There are plenty of other strategies you can employ to significantly boost your vehicle’s trade-in value. We’ve put together a comprehensive guide on how to maximize your car’s trade-in potential—don’t miss out on that valuable resource:

6. Collect your Documents

When trading in a financed vehicle, the dealer will require certain paperwork to verify ownership and loan information. Here’s a checklist of the information and documents you should have ready:

  1. Your loan account number
  2. Your current loan balance
  3. Your driver’s license
  4. Your vehicle registration
  5. Your car keys
  6. Your car’s title (if available)
  7. Proof of insurance
  8. A printout of your trade-in value (if obtained)
  9. Maintenance or repair receipts

7. Use your Equity

Let’s say your car is worth more than what you owe, giving you, say, $4000 in equity. You have a couple of options here. You could put that equity directly towards your next car purchase, sort of like a down payment. Another option is to ask for that extra amount in cash and use it however you want, though it’s usually smarter to put it towards lowering your monthly payments.

Apart from using your equity for the new car, you can also chip in some extra cash you’ve saved as an additional down payment. Doing this will bring down the total amount you’ll need to loan for your new car.

8. Dealership Handles the Paperwork but..

When trading in a financed car, the dealer usually handles paying off your old loan and the related paperwork.

However, make sure to get written confirmation from both the dealer and your lender that your previous loan has been completely paid off. This step is vital to avoid any surprise bills if the dealer delays the loan payoff.

Moreover, double-check that the trade-in value stated in your new car contract matches the amount you agreed upon during negotiations.

Before you finalize your new loan agreement, take the time to thoroughly review the contract. Make sure you understand all the terms and are comfortable with them before signing anything.

9. Start Paying the New Loan

The final step is to begin paying off your new loan. Typically, you have about a month between purchasing the vehicle and when the first payment is due. Consider setting up autopay or creating a reminder to ensure you don’t miss the due date.

Note: We haven’t covered steps on negotiating for your new car and securing the best finance deal for your new car loan. For detailed guidance on these topics, please refer to this guide.

Trading a Car with Negative Equity: Don’t Make these Mistakes!

If you owe more than your car is worth, you’re upside-down on your car loan.

Let’s explore all the options you have in case of being under-water on your loan:

  • Cover the Difference

If your budget allows, the best approach is to pay off the negative equity immediately before moving on to a new car loan. Depending on how much you owe, you might need to dip into your savings.

  • Hold on to your Vehicle

If covering the difference out of pocket isn’t feasible, it might be wise to delay your new car purchase. Continue making payments on your current loan until you pay off the loan or at least achieve positive equity. Making extra payments toward your loan can help you reach positive equity faster.

  • Roll over your Existing Loan Balance

While it might seem easy to roll the negative equity into the loan for your next car—something many dealers will push for—we generally don’t recommend this. This is because you are very likely to end up upside down on your new loan as well. 

Plus, don’t overlook the financial strain of having larger monthly payments due to the increased loan amount.

Yet, if you’re stuck in a situation where you are finding it hard to keep up with your current car payments, trading in your vehicle could offer some relief. This way, you can opt for a less expensive car, which typically comes with lower monthly payments.

Should you Trade in a Financed Car or not?

Deciding whether to trade in a car with a loan hinges on your individual financial situation.

However, let’s break down the potential advantages and drawbacks of trading in a financed car, giving you a better understanding of the situation.


  • Can cut your Monthly Payment:

With the average car payment for a new vehicle reaching a record $738 monthly, maybe you’re facing a tight financial situation where your monthly payments are a struggle, or perhaps, your current car is draining your finances with high ownership costs. In such cases, trading in for a more affordable car with lower monthly payments can ease the financial burden.

  •  Attractive Trade-In Deals:

Dealers often run promotions that sweeten the deal when trading in your vehicle. This can be especially appealing during end-of-year sales when dealers clear out old stock. Snagging a higher trade-in value or special incentives might make it worthwhile to trade in your car before your loan is paid off.

  • Potential Tax Savings:

Trading in your vehicle can lead to lower sales tax obligations in certain states. Since the trade-in value is subtracted from the total price of the new car, you end up paying less overall, thereby reducing your sales tax burden. However, the actual tax benefit varies depending on your state’s tax rate and the availability of trade-in tax credits, which may have a maximum cap.

To understand about sales taxes in detail, check this useful resource out: Do You Pay Taxes When Selling A Car 


  • Negative Equity Impact:

Trading in a financed vehicle for one with higer monthly payments may worsen your financial situation if you have negative equity. Rolling over the difference into the new loan can strain your budget and potentially lead to future financial difficulties.

  • You might get Penalized:

Some lenders impose prepayment penalties for paying off loans before the end of the term. While not widespread, these penalties can be significant in certain states, making trading in your vehicle before loan repayment less advantageous. It’s crucial to verify with your lender whether your payoff amount includes a prepayment penalty.

Get the Right Deal of your Car at Schumacher Used

Trading in a financed car can be a smooth process if you’re prepared and cautious. However, things can get a bit tricky if you owe more on your car than its current value. Whether it’s delaying the purchase or rolling over the negative equity into a new, ideally less expensive vehicle, it’s essential to prioritize your financial position and make the decision that’s best for you.

When making this decision, we always recommend relying on a trusted dealer. They can streamline the experience and reduce hassle for you. Take a look at ratings and reviews to gauge the credibility of the dealership you’re considering.

If you’re in or around New Jersey, we’d love to help you sell or trade in your car. As one of the top-rated dealerships in the state, with nearly a century of service, we pride ourselves on offering top dollar for quality used cars, trucks, and SUVs. Our goal is to make the selling process as simple and transparent as possible.

Just use our ‘value your trade’ calculator, and we’ll provide an offer to buy your car today, valid for up to 7 days. At Schumacher Chevrolet, we’re here to make selling your car a breeze.