How Does Trading In a Car Work?
- When you trade in your car at a dealership, the trade-in value of your current car is applied toward the price of the new car.
- You can trade in your car even if you still have a loan. Typically, the dealer pays off your loan and adds what you owe, if anything, to your new car loan.
- Get a better deal by getting a few offers to purchase your current car and bringing them with you to the dealership.
- Always negotiate the price of your new car before you start talking about your trade-in.
How does trading in a car work?
When you bring your car to the dealership, the dealer will make an offer to buy your car based on its current value and condition. You can negotiate this offer. If you accept, the dealer will subtract the negotiated amount from the price of a new car.
If you have a loan on your current car, you can pay it off or have the dealer handle it. If the dealer pays off the loan, any remaining balance you owe will be added to your new car loan.
To figure out how much you’ll owe for your new car, find these three numbers:
Price of new car
The dealer ultimately sets the price of your new car, but you can estimate how much you’ll pay by looking up a new car’s MSRP or a used car’s Kelley Blue Book value.
Value of current car
Estimate how much your car is worth with a car pricing tool, like the ones on Kelley Blue Book or Edmunds. You can also get offers from car-buying sites like CarMax and Carvana.
Loan payoff amount
Determine how much is still owed on your current car loan by using your online loan account or a recent statement. Either you or the dealer will need to pay off your current car loan to complete a trade-in.
(Price of new car) + (Loan payoff amount on current car loan) – (Value of current car) = How much you’ll owe for your new car
Remember to account for dealer fees and taxes, which can add 8% to 10% to the price of your new car.
How to trade in a car
1. Prep your car. Clear out your belongings and give the car a quick clean. You can generally skip professional detailing if you’re trading in at a dealership — they’ll handle that before resale.
2. Find your paperwork. Pull together your title (if you own the car), your loan agreement (if you don’t), your car’s registration and any records or receipts you’ve kept for car maintenance.
3. Do some research and get offers. Estimate your car’s value on Kelley Blue Book , Edmunds and J.D. Power and take the time to get real, verifiable offers from other dealerships or car-buying websites like CarMax and Carvana. Print out or save the estimates and offers on a tablet to use when negotiating your car’s value with the dealer.
4. Get preapproved for a car loan. A common car sales tactic is to charge higher rates at the dealership. Prevent this by having a preapproved car loan offer in hand before you set foot in the dealership.
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5. Negotiate with the dealer. When you’re done negotiating the price of the new car and have that number in writing, discuss the trade-in with your dealer. The dealer will likely ask to see the car before making an offer.
6. Be prepared to walk. You can negotiate the sale price based on your car value estimates, your maintenance records and the highest offers from other dealers or online car sites. If you feel pressured or don’t think the trade-in is worth it, you can walk away and sell your current car elsewhere.
Pros and cons of trading in a car
Pros
- Convenient. You can save time and effort by consolidating your car-buying and car-selling processes.
- Less paperwork. Your dealer will manage the paperwork for you, which won’t happen if you list and sell the car yourself.
- Solves two problems. You’ll leave the dealership having sold one car and purchased another.
Cons
- Could make more money selling the car elsewhere. It’s possible that you’ll make more money by selling the car yourself on Craigslist or another private-sale website.
- Could be underwater immediately. Rolling your current car loan into your new one could mean you’ll owe more on your new ride than it’s worth when you drive it off the lot — and that’s a risky financial move.
Frequently asked questions
Yes, trading in your car can be a good idea if you own your car outright or owe less on the car than it’s worth. But since cars depreciate (in other words, lose value) quickly, think twice before trading up for a new car when your current ride works just fine.
Unless your car stops working or isn’t safe on the road, avoid trading in your car when you owe more than it’s worth. Learn how to get out of an upside-down car loan.
Trading in a car with a loan is possible, but it’ll add some steps to the trade-in process. If you have positive equity in the car — meaning you owe less than the car is worth — the dealer will subtract the difference from the cost of your new car.
But if you have negative equity, you can pay off the car early, cover the difference out of pocket or add what you owe to your new car loan. Learn more about how to sell a car with a loan.
We outlined the best practices for trading in a car above, but here’s a simplified version of the trade-in process:
- Go to the dealership with all of your paperwork (title, registration and current loan).
- Negotiate the purchase price of your new car.
- Negotiate the selling price of your current car.
- Pay or take out a loan for the difference.
- Sign the paperwork.
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