How Does Trading in a Car Work?

by Patrick Gleeson, Ph. D., ; Updated May 18, 2018
How Does Trading in a Car Work?

The general idea of an automobile trade-in is pretty simple: You bring your car to the dealership and they take it, crediting you with the value of the trade-in against the cost of the car you're buying – and you're done. For several reasons, the reality is often a bit more involved.

How Does Trading in a Car Work?

The first step when you're trading in the vehicle you presently own is to determine its trade-in value. Go online to one of the major auto-evaluation sites, like Kelley Blue Book, and answer the questions that determine the value of your trade-in. For instance, suppose you have a 2010 Kia Soul Sport Wagon. It's in good condition with 70,000 miles on it. Oh, and it's red. Surprisingly, sometimes the paint color makes a difference in the value.

When you enter the information for your Kia, the Blue Book site returns the information that trade-in values range from a low of $4,629 to a high of $5,928. This is the range of values that dealers have recently allowed for a Kia like yours.

You'll also see another number below the range numbers identified as the "Trade-In Value." In this instance, it's $5,279. This is the value halfway between the high and low trade-in values and generally represents what you can reasonably expect to receive. Incidentally, these values vary by zip code (the Kelley site looks up yours when you connect to the site) and are good on the date you enter your information. The values in the example, for instance, are for zip code 90065 on May 11, 2018. They won't change much in a week, but a bit longer than that and you'll need to re-enter your Kia's information.

Now, repeat the same Kelley Blue Book process for the car you're planning to buy. If it's a 2018 Chevrolet Bolt EV, the site will present you with various options from which you can choose. In this instance, assume you've gone with the standard options, which make it a 2018 Chevrolet Bolt LT. The site determines that the range from low to high for this vehicle is $33,611 to $35,362 and that the "fair purchase price" is $34,487.

What this tells you is that the net price you're looking for is around $29,208_,_ which is the fair market value of the Bolt minus the average trade-in value of the Kia.

Armed with this knowledge, you're ready to begin shopping. You'll generally want to shop more than one dealer, and it's in your best interests to let them know:

  1. You're shopping several dealers before you buy and 
  2. You've already determined the fair trade-in value for both your Kia and the particular Bolt you're interested in buying.   

Can You Trade in a Car You Still Owe Money On?

Often, your trade-in won't be fully paid for. But as long as the amount you owe is less than the trade-in value of your car, this won't be a problem. Just do the math beforehand, so you know what to expect. For instance, if you're trading in a car worth $12,000 and you still owe $4,000, the net trade-in value is $8,000, which is the amount the dealer should deduct from whatever the fair market value is of the car you're buying.

The trade-in process gets more complicated if you're "upside down" with the loan, which means that you owe more money on the car than it's trade-in value. Dealers will often tell you that "they'll take care of it for you," but what they really mean is that they're going to add the amount for which you're upside down to the cost of the new car. Sometimes you're better off paying down the loan on your present car before trying to trade it in. In upside-down situations, the dealer's a little more exposed financially because the amount added to the new car loan means that if you default and the new car has to be repoed, he might not be able to sell it for the full loan amount. Typically, this makes the dealer less inclined to give you a deal on the new car. Financially speaking, you might be better off continuing to pay down your current loan until you're no longer upside down before buying another car.

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Can You Trade in Your Lease for Another Car?

You can trade in your lease on another car. The situation in many ways is similar to trading in a car on which you still owe money. When you trade in a leased car, the car dealer determines the leaseholder's payoff amount (which you should also determine beforehand, so you'll be able to evaluate the dealer's offer). At that point, if your car is worth more than the payoff, the dealer should credit the net amount toward the cost of the new car. For example, if your car's average trade-in value is $16,800 and the payoff on the lease is $8,000, you're entitled to an $8,800 credit toward the purchase price of the new car.

If you're upside-down on the lease, meaning the payoff on the lease is more than car's trade-in value, the same cautions apply to the lease trade-in as to the trade-in on an upside-down car you're buying with an installment loan. It's often better to deal with the lease as a separate transaction by paying off the lease first and then shopping for the new car. Because lease agreements often have substantial penalties for termination before the lease expires, be prepared for an upside-down situation. If the numbers really don't work out, it may be better to wait to buy your next car until they do. Often, toward the end of a lease, the numbers do begin to turn in your favor and at some point, the car's trade-in value will exceed the lease termination cost.

Can You Trade in Your Car If It's Broken?

Whether or not you can trade in your car if it's broken depends on how badly it's broken. Even if you still owe money on it, the situation is essentially no different than trading in a car in good condition as long as the average trade-in value for a car in your car's condition exceeds the amount you still owe. If it doesn't, the cautions about upside-down trade-ins apply.

Before you bring a car in bad shape to a dealer, get repair bids from a couple of auto body shops first. You're then in a better position to know if your dealer's trade-in offer is fair or not. The dealer's allowance should equal the Blue Book average trade-in value for a car in good condition minus the cost to put it in good condition again. If it's in really bad shape, however, the dealer is probably only going to be able to sell it at auction, usually getting a very low price. This doesn't mean you can't trade it in; you still can, but the trade-in allowance will take the auction sale into account and the trade-in allowance may not amount to much.

Can You Use Your Trade-In as a Down Payment?

Yes, you can! Not only that, you can also use it as the initial payment on a lease. The greater the initial payment, the lower your lease payments will be.

Tips

    • Keep in mind that when you're trading in your car for a new one, you're the one in control of the transaction, not the dealer. If you don't like the offer, don't take it. Shop around for a better one.  
    • Remember, too, that the salesperson is not your friend: Don't let him chat you up. Be polite but keep the focus on the transaction. 

About the Author

I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.

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