Can I trade my car for a cheaper car?
Certainly. But the way you do it will depend on your particular circumstances. Let's take a look.
If you want to trade your car for a cheaper car, it probably means you are finding it difficult to afford payments on the car you now have. Or you simply want to trade down to have a little extra money each month by lowering your payments.
Let's look at the two different possible situations, one of which will match your particular situation.
You are "upside down" on your current loan. That is, you currently owe more on your loan than your car is worth as a trade-in vehicle. You can determine how upside down you are by first asking your bank or loan company to give you your loan payoff balance. Then compare that amount to the actual trade-in value of your car (see www.kbb.com and www.nadaguides.com). The difference in the two amounts will tell you how much you are behind in your loan ("negative equity").
If you went to a dealer and found a cheaper car, the dealer would add your negative equity to the price of your newer car, which might make it not so cheap anymore. In fact, your cheaper car could easily result in higher monthly payments than before, which is not the result you wanted.
This technique will only lower your monthly payments and work if 1) you are not upside down by very much, and 2) the new loan company will approve the larger loan, and 3) the price of your new car is significantly less than the old car. It would also work if you could pay the negative equity in cash as a down payment.
Otherwise you are better to simply find a way to keep making payments on your old car. If you pay down your loan such that you are no longer upside down, you will have more options, as described below.
However, you can do even better if you sell your car yourself, rather than trade it at a dealer. You can get much more money that way. Sell the car, pay off your loan yourself, and use the leftover money as a larger down payment on your new car, or keep some of the money. Either way, you maximize the value of your old car, which helps minimize the cost of your new car.
Summary
Trading your car for a cheaper car only works if you are not upside down on your loan, or not significantly upside down. Otherwise, you may find that your cheaper car is actually more expensive since, in effect, you would be paying off two loans at once.