How Do Car Trade-Ins Work?

How Do Car Trade-Ins Work?
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If you're in the market for a new car, you more than likely have an old used car you would like to trade in. Obviously, you want to get the maximum trade-in value for your old car, and you would like to pay the lowest price for a new car.

But what's the best way to trade in your old car? Is it better to take an offer from a dealer, or should you try to sell it yourself?

What are the pros and cons of each way?

Research Your Car’s Value

Before deciding whether to trade in your current vehicle at a dealer or sell it yourself, you should find out how much your old car is worth. You can check the current value of your car with websites such as Kelley Blue Book and Edmunds. You’ll need this information to set an asking price if you are going to try to sell the car yourself and also to know if the dealer is offering you a fair price.

Read More​: Cheapest Way to Buy a Car

Trade It In at a Dealership

Trading in your old car at a dealership has a number of benefits. The best benefit is it’s simple and quick. You go to the dealer with your car, the dealer makes a trade-in offer and you apply that money toward the purchase of your new car. The dealer takes care of all the paperwork: paying off the old loan and the transfer of titles and registrations. You drive in with an old car, and you drive out with a new one.

Although trading in your car at a dealership is easier, you'll get a lower price than selling privately. The dealership will more than likely pay you the wholesale value or auction price for your car, not full retail. The dealer will have to spend some money to put your car in good condition, like replacing the tires and giving the car a thorough cleaning and waxing. Don't forget, the dealer still has to make a profit when selling your old car.

Another factor to consider is sales tax. Many states calculate the sales tax only on the difference between the value of your trade-in and the purchase price of the new car. For example, suppose you're buying a car with a purchase price of ​$30,000​, and your trade-in has a value of ​$20,000​. You would only pay sales tax on the difference of ​$10,000,​ not on the full purchase price of ​$30,000.

For example, suppose your state has a ​6 percent​ sales tax. If you trade in your car at a dealer, the sales tax on the difference of ​$10,000​ is ​$600​. On the other hand, if you sold your old car privately, you would pay ​6 percent​ on ​$30,000​ or ​$1,800​. That's a difference of ​$1,200 ($1,800 less $600)​.

Sell It Yourself

You'll get more for your car if you sell it privately. However, you have to be willing to invest the time and effort to advertise your car and allow prospective buyers to inspect your car and take test drives.

To sell your car privately, you have to pay advertising fees, meet with prospective buyers and handle the transfer of ownership yourself. This whole process can take a few weeks or even several months to find a buyer willing to pay your asking price.

On the other hand, if you're trading your old car in with a dealer, you can have everything done in a day or two. You have to decide for yourself if selling your car privately for maybe a few thousand dollars more is worth the effort rather than just simply trading it in to the dealership at a lower price.

What if You Have Negative Equity on Your Car Loan?

Suppose you still owe ​$10,000​ on the auto loan for your old car, and its value is only ​$9,000​. In this case, you owe ​$1,000​ more on your loan than the car is worth. That's considered negative equity, or being “underwater.”

You have a choice. You can either pay off the negative ​$1,000​, or you can roll this amount into the loan for a new car. However, unless you make a significant down payment on the new car purchase, you may find yourself with little to no equity in your new car if you roll the negative equity from your old car into a new loan. And don't forget that new vehicles depreciate 20 to 30 percent the second you drive off the dealer's lot.

Tips To Getting the Best Price for Your Trade-in

Whether you decide to sell your old car privately or trade it in to the dealer, here are a few tips that will help you to get the best price:

  • Give it a wash​ – Clean cars will get a better price than dirty ones. Wash your car, vacuum the interior, wash the wheels and apply tire shine.
  • Don't clean everything out​ – Even after you've cleaned your car, don't take out all of your papers, personal effects and other belongings. If the dealer sees that your car is totally cleaned out, they’ll know that you're ready to get rid of your old car for a new one. This gives them a negotiating advantage. Even if you’re ready to buy on the spot, don't let the dealers know that. Give them the impression that you're still shopping or unsure about making a decision.
  • Repair small dents​ – Dealers expect all used cars to have a few minor dings. Minor scratches shouldn't affect the value of your car. But if you have more than a few, you should find a company that specializes in repairing small dents. This may only cost ​$50 to $100​, but it'll be worth the investment.
  • Fix minor problems​ – Fix any small problems that could affect the value of your trade in, like a sagging headliner. You want to give the dealer the impression that your car has been well maintained. Another idea is to replace the battery in your key fob to make sure it's in good working order.
  • Look at your tires​ – While replacing your tires it's generally not a good idea, if there's absolutely no tread, you should replace them. The dealer can use the low-tread life remaining as a reason to lower the offering price. Also, if your tires have curb rash, you should hire a company to repair the damage before taking your car to the dealer.

Trading in your old car with a dealer is simple, quick and convenient, but you’ll get a lower price for your old car. Dealers have to make a profit, so they're going to pay you less for your old car because they have to spend money making repairs and getting it in good condition to be able to resell it.

If you sell your car privately, you'll get a higher price, but you’ll have to invest in advertising costs and make time to let prospective buyers test drive your car.

Regardless of which way you decide to go, you'll want to clean up your old car and make the minor repairs so it’ll look attractive and well-maintained to either the dealer or a private buyer.