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How Does Trading In a Car Work? What You Need to Know Before Hitting the Dealership
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If you’re looking to trade in your car, you should know what your vehicle is worth and how much you owe on it before you walk into a dealership. The more informed you are in general about your car and how trading in a car works, the more confident you can be as you go through the process. Below, we will explore the trading-in process and provide tips on the best ways to maximize your trade-in.
- Find out what your trade-in is worth
- Find out how much you owe on your car
- Shop around for trade-in quotes
- Gather documents
Understanding your car’s price and value
By trading in a car, you’re selling your vehicle to a dealership as part of your transaction in buying or leasing another vehicle. Most traditional dealerships will not buy your vehicle outright, but they will accept it as a trade-in, requiring that you put any equity from your trade-in toward your new car. Some businesses, such as CarMax, offer to buy consumers’ vehicles outright, in which case the transaction wouldn’t be considered a trade-in but a sale.
You’re likely to see four types of prices when you’re dealing with trading in a car: wholesale, trade-in, private and retail. Here’s how each price works:
- Wholesale price or value: The wholesale price is the vehicle’s auction price. Some dealers purchase used vehicles at auctions and resell them. The price they pay is the wholesale value, and it is generally the lowest of the four prices you might see when looking at trade-in value.
- Trade-in value or price: If you trade in your vehicle, you could generally expect a value close to the wholesale value of the vehicle. Your vehicle may be worth more if there is a high demand for your particular vehicle or it’s in great condition.
- Private sale price or value: This is the amount you could expect if you decide to sell your vehicle to another consumer in a private sale, say through Craigslist or other platforms. This number is usually higher than the trade-in value.
- Retail price or value: The retail price is what you would expect to pay for a car at a dealership.
Steps to trade in a car
1. Find out what your trade-in is worth
Dealers use a variety of different references to determine what your used vehicle is worth. They can use the Black Book or Blue Book to find wholesale values. To get a good idea of what they might offer you, it’s best to use an industry guide like Kelley Blue Book (KBB) to find out what your trade-in is worth. You’ll need to know the vehicle make, model, mileage and condition. KBB says that about 54% of trade-in vehicles qualify as “good condition.” Here are the four most popular industry guides for vehicle appraisal. The first three are free for the public to use online. Black Book is an industry guide that dealers can access for a fee.
“When you’re trading in a car, the dealership that [you] trade to will not be offering any more than the rough- to average-wholesale price for the vehicle,” says Steve Lang, a longtime auto auctioneer and car dealer out of Atlanta who co-developed the Long-Term Quality Index. Expect the dealer to offer a low value, and aim to get at least trade-in value for your car. The only common reasons you wouldn’t be able to get trade-in value are if your car was in a major accident or if it has a salvage title.
What’s my truck worth?
You could use the same industry guides listed above to find out what your pickup truck is worth. But if you’re wondering how much your truck is worth and you have a commercial vehicle, you could:
- Buy a Price Digests report. Formerly known as the Truck Blue Book, it allows you to find out what a truck is worth by searching its vehicle identification number (VIN) or by searching the year, make and model. Unlike passenger vehicle appraisals, though, the Price Digests report isn’t free. It costs $29.95 for one report. If you’re in the business and frequently need truck appraisal reports, subscriptions start at $419.95 for truck valuations and go up to $999.99 if you also want to value trailers, RVs, powersport vehicles and more.
- See what similar vehicles are priced at. Look at dealers’ online inventory and at ads in industry papers to see the asking price for vehicles similar to yours so you can get an idea of your truck’s retail value.
2. Find out how much you owe on your car
If you have a free and clear title with no lien on it, you’re in business. If you still owe money on your trade-in, find out how much. You could still sell or trade in a car with a loan. Contact your lender and ask what the payoff is on your auto loan. Compare what you owe on it to how much it’s worth as a trade-in.
If your car is worth more than what you owe, then you have positive equity and can use the difference as a down payment on your new car, which could lower your monthly payments. For example, if you owe $10,000 on a car that’s worth $15,000, you would have a $5,000 credit toward the purchase of your new car.
If your car is worth less than what you owe, don’t despair, you could still trade in your car, but you’ll need to cover the difference with a down payment or roll the difference into your new car loan. If you add it to your new car loan, know that your payment and interest can increase. For example, if you owe $25,000 on your car and it’s worth $20,000, then you could roll $5,000 into your new car loan. Here’s more on how to get out of an upside-down car loan.
Can you trade in a leased car?
Yes, and the process is very similar to trading in a car with a loan on it. The dealer will assess the vehicle’s trade-in value and pay off the leasing company. If the car is worth more than the payoff to the leasing company, the positive equity counts toward your new car. If it’s worth less, you’ll have to pay the difference.
How much do car dealers make on trade-ins?
People in the industry report that dealers can make between $1,000 and $2,000 by reselling trade-ins. If you’re curious what the dealer could make on your car, look at the retail value of your car versus the trade-in value. The difference is roughly what the dealer could make by reselling your car, not counting any costs in cleaning and repairing or other business overhead expenses like advertising.
3. Shop around for trade-in quotes
Trade-in offers can vary, depending on what the dealer already has in inventory, the car’s condition and how well the dealer feels the car will sell. You could prevent some of the back-and-forth negotiating at one dealer by getting a few trade-in quotes from different dealers. Get a quote from one, go to another and ask it to beat what the first offered. Be sure to get all offers in writing. Here are some places you could go:
A different brand dealership. Take your car to a dealer that does not sell your car’s brand. An example would be taking your Ford to a Nissan dealer because a non-Ford dealer may offer you more. The reasons behind this are that there are fewer Fords with which to compete and “If the car you are driving was a popular rental, lease or fleet model, they also transact at lower prices,” says Matt DeLorenzo, managing editor for Kelley Blue Book. If you go to a dealer of the same brand, you could be “competing against those depressed prices with your privately owned vehicle.”
A used-car-only dealership. Places like CarMax advertise fast, free quotes on trade-ins, so stopping by may be a pretty painless way to get a written trade-in offer.
Online services. Some sites offer to buy your trade-in online. Whether you trade in your car for a new one or sell it using an online site, an offer from an online service might be useful. KBB Instant Cash Offer is one example of a site you could use.
4. Gather documents
To officially trade in the car, you’ll need the following documents.
- Car title. If you own the car, bring the title. This proves that you legally own the car and that you are authorized to transfer ownership. If you lost the title, don’t sweat too much. Dealerships usually keep a form on hand that you can sign requesting a lost title replacement. But you still need to prove ownership, which you could do with your car registration.
- Car registration. Whether you paid off the car or not, the registration could serve as proof of ownership.
- Loan information. If you’re still paying off the car, you should bring your loan information with you, including the lender, the account number and the amount you have left to pay off the loan.
- Maintenance records. Bringing these could help prove that you’ve taken care of the car and that it deserves a higher price for being in good, if not prime, working condition.
“Come into the dealership with a good idea of what your vehicle is worth and what you’d be willing to settle for,” says DeLorenzo. Dealers will often make a low offer, expecting you to negotiate up. But you shouldn’t take less for your trade-in than what an industry guide says it’s worth.
Negotiating pointers. Here are some things to know when you’re negotiating your trade-in value at the dealership.
→ If a representative at the dealer says the trade-in value you looked up doesn’t apply because they use a different guide, ask which guide they used and then look up your car’s value on your smartphone using that source. Verify that they are being honest with you about the price.
→ If you’re upside down on your car loan, ask the dealer to cover that amount, even if it’s more than the car is worth. That could be your negotiating starting point when you’re looking to use your trade-in to help buy a new vehicle from that dealership. You’ll never know what you could get until you ask.
→ Make sure the dealer doesn’t raise the price of the car you want to buy in order to make up for agreeing to a good price on your trade-in. This is a common tactic used by dealers that like to keep an eye on their own bottom-line profit. It’s easy to thwart — just check and make sure that the price on your new car doesn’t go up on any of the paperwork after you agree to it.
Pros and cons of trading in your car
- Simplicity and speed. Once you have settled on a deal, the dealership will take care of the entire process for you. Compared with selling the car on your own, you could be saving yourself weeks trying to find buyers.
- Repair issues. If your car has serious issues with the engine or transmission, you may get a better price with a dealer that won’t have a huge problem finding the parts and skilled labor to fix it rather than selling it on your own to a person who might not have the inclination or cash to make the repairs.
- Potential sales tax break. Depending on the state you live in, you may get a tax break on buying your new car if you have a trade-in.
- A cashless down payment. If you have positive equity in your trade-in, it can count as a down payment on your new car, which allows you to have a down payment without coming up with the cash out of pocket.
- Limited options. Ultimately, you have to work with the dealer that has the car you want to buy, and you are limited to whatever trade-in price that one dealer agrees to. If the trade-in price the dealer offers you is a deal-breaker, you’ll need to find another car to buy at a different dealership.
- Less money. If your goal is to get as much money for your trade-in as possible, you’re usually better off selling the car on your own despite the inconveniences.
- No guarantees. Once you trade in your car and sign all the paperwork, the dealership can legally sell your car even if the deal for your new car doesn’t pan out because of credit or another financial issue.
Is trading in your car worth it?
An easy way to see if trading in your car to a dealer is worth it is to look at the difference between your car’s retail value and its trade-in value. For example, if your car has a retail value of $12,000 and a trade-in value of $10,500, you’re essentially paying the dealer $1,500 to clean, repair and sell your car for you with all the accompanying paperwork and the necessary trip to your state’s Department of Motor Vehicles (DMV). If you don’t think the difference is worth it, try to sell it as a private seller. If you do think the difference is worth it and/or you’re unable to sell it on your own, then trading in your car is worth considering.