If you plan to trade your car in, it may not prove beneficial to pay off your loan first, depending on your vehicle's value. If you want to take an additional car loan, you may be able to do so depending on your credit standing and income. Determine your budget and overall loan costs before deciding if it is beneficial to pay off your loan.
Trading the Vehicle
If you trade in a car that still has a loan on it, the dealer will pay off the loan amount to take ownership of the vehicle. If you owe less than your vehicle is worth, the value after the loan payoff amount goes toward your new loan as a credit. If you owe more than your vehicle's worth, you can transfer the extra amount into your new car loan. You do not have to pay off your car loan in either circumstance, but you should put down enough money to cover your negative equity.
Pursuing a Second Loan
Your bank considers your income, credit history and the term of your current loan to determine whether or not you can borrow a second loan. You must have sufficient income to pay for both car loans and a stable employment history. Having two car loans is not uncommon, but you should ensure your income is stable. You may want to make sure you have less than a year left on your current loan to ensure you will own at least one vehicle should unforeseen events affect your income .
Sell Your Car
If you don't want to trade your vehicle in or prefer to have one car loan, you can sell your current vehicle on your own to pay off the loan amount. Private sales warrant more than the value of trade-in amounts. Also, you can use any extra profit from the sale to put down toward your new vehicle loan. If you owe more than your vehicle is worth, you must have the cash to pay off the excess loan in addition to your sale price. Most states don't allow title transfers when a loan exists.
Considerations
Consider your current interest rate. If you can afford to pay off your current loan, do so to avoid paying toward interest. Your interest rate can cost thousands of dollars during the term of your loan. Trading in a negative equity car also has its consequences if you don't put money down; you will own your new vehicle for more than its value, which causes problems if you try to sell or trade again in the future.
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