Trading in your car is a fast way to get rid of your old vehicle at the same time you buy a different one. But there are some important things to know about how to get the best deal before you start the process.
How does trading in a car work?
The biggest advantage of trading in a car — versus selling it yourself — is that a car dealer will subtract its value from the purchase price of your new car. A dealership employee will look at it, drive it, and estimate the amount of money they are willing to pay. This offer is contingent on your purchase of a different vehicle.
The catch is that it’s often difficult to get the dealer to give you the full value of your old car. It’s even trickier if you still owe money on your old car.
Pros and cons of trading in a car
Trading in a vehicle isn’t the right move for everyone. You can almost always get more for your car if you sell it on your own, but it will take longer. To find out how much your car may be worth in either scenario, check private party and trade-in values from Kelley Blue Book or Edmunds.
Here’s how to know whether you should sell your vehicle to a private party or trade it in at a dealership:
- The trade-in process is faster than selling a vehicle on your own.
- Your trade-in price reduces the total purchase price of your new vehicle.
- Because of the lower price on your new car, you’ll save money on sales tax.
- If you have negative equity or are “upside down” on your car loan, it means you owe more money on your car than it’s worth. Trading it in may allow you to add your current loan balance to your new loan. This has some serious downsides — not only would that amount be added to your new principal, you would pay interest on it, too. We’ll discuss negative equity in more detail later.
- Trade-in value is less than private party value, meaning you’ll get less money for your car if you trade it as opposed to selling it on your own.
- If you trade in your vehicle, you must buy your next car from the dealership, which could limit your options.
- Negotiating a fair price for your trade-in could be an intimidating process.
How to get the best trade-in deal
There are a few things you can do to get the best possible deal when you trade in your car.
Keep the trade-in deal separate from the purchase of your new car.
If you focus on one part of the deal at a time, you’ll have a more complete understanding of whether the dealership will pay a fair price for your trade-in. Let the salesperson know that you prefer to come to an agreement about your trade-in value before moving on to negotiating the purchase price of your new vehicle.
Get trade-in offers from more than one dealership.
Having more than one offer will help you negotiate a better deal. Talk with at least two dealerships where you feel comfortable buying a new or used vehicle to replace your current one. Be wary of a salesperson who tries to talk you out of shopping around.
Take a break to think about the offer before you sign paperwork.
Trading in a car isn’t something that most people do more than a few times in their lives. The process can seem overwhelming. Since there is probably a large amount of money changing hands, it makes sense to take some time to think about all aspects of the deal. Take a break for lunch or go for a drive and make sure you feel comfortable before moving forward.
Know how much your car is worth.
As we mentioned earlier, use online pricing guides to get an idea of what a fair offer looks like. You have the right to expect a decent price for your trade-in, but you also need to have a good understanding of the market value of your vehicle in its current condition.
Clean your car before taking it in for an appraisal.
Surprisingly, many people don’t consider the importance of presenting their vehicle in its best light. Wash and detail your car. Remove personal items, including bumper stickers and magnets. If you can afford to fix any small problems, do so. Bald tires, dirty or low oil and burned-out lights could be a signal to the appraiser that the car is not well cared for, triggering a low-ball offer.
What to watch out for when trading in a car
When it’s time to trade in your vehicle, there are a few red flags indicating that you should move on.
The dealership has a reputation for selling low-quality cars at high prices
Avoid buy-here-pay-here car lots. Even if you want to buy a used car and you have concerns about your credit, it’s better to shop around for auto loans and buy from a reputable dealership.
You feel intimidated or uncomfortable.
Trading in a car involves negotiation, which naturally makes some people feel ill-at-ease. If your salesperson or vehicle appraiser is impolite or insulting, move on.
The salesperson refuses to discuss your trade as a stand-alone deal.
If you want to understand the advantages of trading in your vehicle, you must know the net trade-in value. If your salesperson combines the trade with your new car price and offers only one number, ask them directly how much money you’ll get for your vehicle.
Find out how your new loan treats negative equity
The salesperson might also wrap any negative equity from your trade-in into the new loan offer. While you may find the situation alarming or confusing, chances are the finance manager will take it in stride. Nearly one-third of drivers are underwater on their car loan.
Combining the debt from your old car with the loan for your new car may seem like an easy solution, but it can make it difficult for you to get out of debt. For every $1,000 you add to your new loan, your payment will go up by an average of $20 per month.
If you are upside down on your current car loan, you have options:
- Buy or lease a new car with a big rebate. You may be eligible for rebates and discounts that will help offset your negative equity.
- Keep driving your current car until it’s paid off. It’s not a fun option, but it’s a smart financial move. If your car is in good condition and you only have a few months of payments until you have equity, it may be best to wait.
- Pay off your current car loan with cash. If you have the money in savings and you need a different vehicle, paying off your current loan in full before you trade it in will keep you out of the negative equity debt cycle.
- Sell your car on your own. Private party values are higher than trade-in values, so you may be able to get more money for your car if you sell it on your own. Make sure you can cover the gap between the selling price and the loan payoff with cash, though. The buyer will need proof that your loan is paid in full.
If you do decide to trade in a vehicle that you still owe money on, rolling the old balance into the new one, choose the shortest loan term you can afford. Look at the financing closely, and don’t sign anything until you fully understand the terms of your new loan.
The key to a great car-buying experience is choosing a dealership where you can work with a respectful and honest salesperson, and have the freedom to choose the financing option that works best for your personal situation.
The interest rate you’ll pay on your car loan has a significant effect on your monthly payment and your total cost of ownership. It’s smart to shop around for auto loan rates. Here are a few of the common mistakes people make when they need a car loan.
Many dealerships offer in-house financing. Before accepting the offer you receive in the financing office, compare loan rates and terms at MagnifyMoney’s auto loan marketplace.