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Can you trade in a car you still owe on?

Jodie Humphries avatar
Jodie Humphries
- 4 min read
Can you trade in a car you still owe on?

Trading in your existing car for a newer or bigger car can be exciting. However, it can get complicated if you’re still repaying a car loan on the vehicle. You’ll probably need to discuss the car swap with your lender and get their permission. Also, if you’re selling to a dealer negotiating the trade-in value can be a challenge. If you don’t get the price you’d like for your car, you may end up deepening your debt if you also take out a loan to buy the new car. Ideally, you should check if you can completely repay your car loan before taking on new debt.

How do I sell my car with a loan?

If you want to sell your car but still have a car loan outstanding, the type of loan you have can be crucial. You may have applied for a secured car loan, in which case the car is encumbered, or bearing the loan, no matter who owns it. Add to this that, technically, the car belongs to the lender until you discharge your loan and clear the title. You won’t be able to sell your vehicle without permission from the lender in this situation. You may also need to pay additional charges if you want to repay your loan early before selling the car.

You can also discuss whether you can remove the car’s encumbrance if your loan is secured against your car. If you have enough savings, you could use it to cover the difference between the outstanding loan amount and your car’s sale value. Another option might be to redraw from your mortgage to cover the outstanding balance on your car loan. You can then sell your car without having the loan still on it. You do have to consider if you take this approach you may be making your home the security for your car loan. Consider checking how using your redraw would change your mortgage repayments. You want to make sure you can comfortably manage the repayments, so you don’t risk your home.

With an unsecured car loan, you may not have an option but to repay the loan in full before selling, especially if the potential buyer refuses to buy the car otherwise. In this case, you’d want to recover the entire cost of your car loan through the sale. Ask your lender about any additional charges you’d need to pay if you end your loan term early, before deciding the sale price. For instance, some lenders will charge a break fee and a cost-recovery fee and administration charges.

What happens if I trade in a financed car?

You can trade-in your financed car, but you’d have to discuss your situation with the car dealer. This can help determine if your current car’s trade-in value can cover your outstanding car loan balance. You should also make sure that you’re getting favourable terms if you’re taking out a new car loan, as well as getting a good trade-in value for your present vehicle. The alternative could be racking up an amount of debt that you’d struggle to repay.

When looking to buy a new vehicle while still repaying a car loan, you might want to think about using this checklist of questions:

  1. Is your current car loan a secured one? If yes, you’ll need to get your lender’s permission before proceeding with the trade.
  2. Are you able to repay your existing car loan entirely? If not, you’ll need to ensure that the sum you get for your car is large enough to cover your outstanding loan.
  3. Are you upgrading to a more expensive car? If yes, you’ll need to calculate whether your future car loan could make your overall debt unmanageable.
  4. Have you shopped around for a car dealer who can offer the trade-in value necessary to take care of your loan? If yes, you won’t have to worry about your current car loan and, once you’ve agreed on the trade-in value, you could even ask the dealer to repay your lender directly.


This article is over two years old, last updated on January 20, 2021. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent car loans articles.

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