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What happens if you trade in a financed car?

Jodie Humphries avatar
Jodie Humphries
- 5 min read
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Do you want a new car, but your current car still has an outstanding loan? It may be difficult to sell because of the lender’s claim on it. Instead, you could consider trading in your old car for a new one at a dealership. Trading in a financed car is possible, but you may need the car loan lender’s permission before taking any action.

How can you trade in your financed car?

Trading in your car to a dealer when you have an outstanding loan is possible, as the dealer will typically pay the balance. 

Being upfront with the dealer is important if you’re trading in your car to upgrade it or buy a more cost-efficient vehicle before the loan is fully repaid. Explain to them that you have a loan still owing on the vehicle and the amount you owe on the loan. The dealer may then contact your lender once they know the loan details and you’ve agreed to a trade-in price. The lender and the dealership may then make arrangements to settle the outstanding loan.

One potential benefit of trading in a financed car is that the loan may be smaller if the car you intend to purchase is cheaper than your current car or get a more competitive rate on the auto loan. However, there is also the risk of a bigger outstanding debt or a higher interest rate. Discuss the options with your lender to make the right financial decision.

What to do before trading in a vehicle that is not paid off

If you want to sell your car privately or trade-in for another vehicle while there is an outstanding loan, here are some things you must consider:

  • Find out the exact amount still outstanding on the car loan.
  • Crunch the numbers and double-check if it is possible for you to repay the outstanding balance before selling it or trading in, as this will make the process faster and easier.
  • Check if the lender will charge any break fees or other charges if you repay the loan before the end of the loan term.
  • Read the loan agreement to see if it mentions anything about being allowed to sell or trade in the vehicle before the entire amount is paid off.

If you have a fixed rate car loan, the lender may charge early exit fees if you repay the amount before the end of the loan term. In some cases, the lender may also factor in the estimated interest to ensure it receives the money as per the original agreement. You should check the loan agreement to understand these fees. The exact amount will vary from one lender to another.

Another consideration is the age of the car when you first applied for the auto loan vs the age and condition of the car when you’re looking at trading it in. The age and current condition of the car will impact its current value. If the current value is less than the loan amount, you’ll need to pay the difference on your own, rather than through a trade-in, to receive clearance from the lender.

What other options do I have to sell a financed car?

Although you do have the option to trade in a car before it is paid off, it’s beneficial to know the other available choices. These include:

Sell the car and repay the loan

If the sale amount is sufficient to cover the outstanding loan balance, this can be a simple way to pay off your debt. However, you’ll need to check the terms and conditions of your loan and discuss them with your lender to make sure you can sell the car before the loan term is up. This option will not work if you want to trade in the car for another vehicle.

Refinancing your auto loan

Refinancing your car loan with new terms and conditions may offer more flexibility and greater control. With the new terms, you may get a lower interest rate, a longer loan term, or switch from a secured loan to an unsecured loan. 

Having an unsecured loan may allow you to trade in or sell the car without requiring the lender’s permission. However, an unsecured loan often comes with a higher interest rate, which can hurt your budget.

Pay off the loan

Paying off the car loan is an option; if you have the finances to do this. You could use your savings to repay the balance of the loan amount. Alternatively, you can take out a personal loan at a lower interest rate to repay the car loan. Ensure you check the interest rate and fees before taking a personal loan.

Trading in your car while it is still financed is possible, but doing your research before you decide can be helpful. Getting advice from an expert will help you determine the best way to trade in a financed vehicle.

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Product database updated 11 Oct, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.