Can You Trade in a Financed Car?

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If you’re thinking about getting rid of your current car for a new or used one, perhaps you might be contemplating trading it in. 

Money expert Clark Howard says trading in a car that you still owe money on is a big financial risk that many Americans shouldn’t be taking.

In today’s inflated vehicle market, you’re going to have to tread very carefully so as not to lose big money.

Thinking of Trading in a Car That Isn’t Paid Off? Read This

The scenario for a car owner usually goes something like this: “You’ve gotten tired of the vehicle and you want something else, so you trade it in,” Clark says.

You bring it to your local car dealer and the car salesman or saleswoman entices you to upgrade your vehicle even though you haven’t paid off your car loan.

The dealer tells you what your car is worth, then proceeds to upsell you into a new or used vehicle on the lot.

Why You Should Never Trade in a Car if You Owe Money on It

But when a car owner brings a vehicle they’re still paying on to a dealer, they’re taking some mighty big risks, Clark says.

Big Risk #1

“You’re trusting that the dealer you’re trading the vehicle in to,” Clark says, “is going to pay off the loan on that trade-in.”

The truth is that the dealer has no legal obligation to do that and here’s why: “You signed the note originally for the vehicle you traded in,” Clark says.

Some bad things can happen because of this unwise money move, including:

  • The vehicle could end up being repossessed, which could wreck your credit and ultimately lead to a court judgment against you in many states.
  • Once you lose the vehicle, you’ll still have to pay for it — you’re now without a car or the cash.

Big Risk #2

You let the dealer roll your outstanding balance for your old car into the loan for a new one, saddling you with a ginormous car note to worry about.

“What happens is such an unbelievable disaster that it may take you years and years to recover,” Clark says.

If you do agree to a new loan that absorbs the old one, more bad things could happen. You could still find yourself in a situation where the dealer may be strapped for cash and not pay off your trade-in.

The lender could then take legal action to go after who’s legally responsible: YOU.

“You’re the one on the hook for the payment of that vehicle,” Clark says.

Because of those equally bad outcomes, Clark has a “Never, Not Ever Rule” when it comes to this type of situation:

“Never, never, never trade in a vehicle you still owe money on. Period. Problem solved,” Clark says.

He adds: “If you trade in a vehicle that you own free and clear, this disaster cannot happen to you.”

Should You Get Your Car Fixed?

Because of the crazy prices in the car market, the ideal solution is to hold onto your current vehicle, making sure to keep up with the regular maintenance, rather than fork over big money for a pricey new car that could potentially drop in price later this year or next.

If you absolutely must buy a vehicle, Clark suggests that you go through a credit union, which will typically have better interest rates and prices than a dealership.

Bottom Line

So, the moral of this story is to resist the urge to jump into the latest and greatest just because your vehicle is getting a little long in the tooth. If you’re still paying a car note on your vehicle, do everything you can to pay it off before you shop for a new car.


“You solve so many problems that could happen in your life if you don’t get tempted to get rid of a vehicle that you still owe money on — especially if you’re upside down,” Clark says.

It may be a hard pill to swallow, but here’s Clark’s parting advice: “Take the bitter medicine and keep driving the thing even if you don’t like it anymore.”