You do not have to pay off your vehicle car loan prior to trading in the car. When you go to trade the car with the new dealer, you will need to tell the dealer there is an active loan on the car. This will set a process into motion for your new auto dealer to close the loan.
New Dealer Negotiates Pay Off
The person who is purchasing the new car will have to negotiate a payoff for the current loan. This is one of the rare cases where a prepayment will not count against your credit score. Instead, the new dealer will basically be assuming the loan when purchasing the vehicle.
You Pay the Difference
If the dealer offers you a lump sum payment for your trade in, this payment will be used to pay off your old car loan. You may find that you make money on the trade in, and you can use the difference in loan amount and trade in value to make a down payment on your new car. You may also find the trade in quote is lower than the amount you have remaining on your loan. In this case, you will be responsible for paying the difference before the dealer takes your trade in.