According to Auto Credit Express, a car owner can trade in a vehicle even if he still owes on it. The dealer asks for the pay-off amount on the auto. If the payoff is less than the car value, then the difference is normally applied to a new car purchase.
The old car debt can be paid off by the dealer when the new car is purchased. However, if the payoff amount is more than the value of the car, or if the purchaser is upside down on the old car loan, then purchasing a new car becomes risky says Auto Credit Express. Either the purchaser must pay the amount that is owed out-of-pocket or roll over the debt into a new loan.
Freecreditscore.com warns that the payments on an old car loan do not magically disappear if a buyer plans to trade in his old car and purchase a new one. The remaining balance still needs to be paid, by the car owner, car dealer or a bank loan.