You can absolutely trade in a car with a loan on it, but any money you get has to be used to pay off your current lien before anything else. You won't have to handle this � your dealer will take care of everything involved with paying your old lender and getting the title to the car. However, paying off your existing loan is easier if there's equity in your vehicle. Equity is the difference between the actual cash value of the car and the amount you owe on the loan. If you owe less than the car is worth, there is equity. On the other hand, if you owe more than the car is worth, you have negative equity. Negative equity, also called being �upside down� or �underwater,� puts you in the position of having to pay the difference between the amount you get for your trade-in and how much you owe. This amount can be paid out of pocket, or rolled into your new loan. Be aware that rolling any additional amount into a new loan isn't always an option, and it'll end up costing you more in interest charges over the term of your loan. If you have negative equity in your vehicle, you may want to reconsider trading it in until you're in a better equity position or you can cover the difference out of pocket.