Simple: Once you've traded in your car, the dealership deals with your bank or financial institution in order to pay off the loan for you. The result is that you usually won't even have to bother calling your bank to inform them you're selling your car; instead, the dealership will do all the legwork. Trade-Ins When Your Car Loan is Upside-Down If, however, the value is less than the payoff, you have negative equity and are upside down in the loan. Let’s flip the last example — you owe $5,000, and the trade-in is only $3,000. If the amount of money you owe on your car loan is more than the value of your vehicle, then you have negative equity in it. This is also known as being "upside down" or "underwater." And when you have bad credit, it can be difficult to trade in a car in which you have negative equity. First, let's start with this: negative equity is quite common.