Choosing to trade in your vehicle at a dealership and apply the credit to the purchase of a new car or truck is a common practice, and the process is simpler and more secure than selling the vehicle outright on your own. Although you might get less for your trade at a dealership than you would selling it yourself, you will probably save time and get tax savings by trading to a dealership.
Owning Your Vehicle Outright
If you own your vehicle outright, meaning you have the title in your hand and there is no outstanding loan or lease on the vehicle, you can trade in the car or truck to a dealership and use the trade value of the vehicle as a down payment. Owning your vehicle outright also lets the dealership know that your car sale will be relatively easy to complete, because you do not have an outstanding loan that must be paid off in conjunction with your new car purchase.
If You Have a Loan
If you currently have an outstanding loan on your vehicle, the remaining balance on your loan must be rolled into your new car transaction. If you owe more than the dealership offers for your trade, you will actually carry a negative down payment into your new car purchase, meaning that you must finance the negative equity in order to pay off your old loan and get a new car. If you owe a significant amount more than your trade is worth, you might be required to put money down toward your purchase.
If You Have a Lease
Although uncommon, it is possible to trade a leased vehicle and use the trade value as a down payment toward a new car or truck. In order to use a leased vehicle as a down payment, the dealership must purchase the vehicle from the leasing company and offer you more than this purchase amount for your trade. Dealer purchase prices for leased vehicles are often higher than market value, so the likelihood that this scenario would be to your advantage is slim.
In the event you trade your vehicle at a dealership, you are given a tax credit for the trade value of your old car. For example, if you are given $10,000 for your vehicle and the sales tax rate in your state is 7%, you would save $700 by not having to pay tax on the trade value of your old car.