Whether you've outgrown your old car, want an upgrade or need something that better suits your lifestyle, you're probably wondering how to transition into a new vehicle. Trading in your car is an attractive option for many shoppers, and more than 60% of the used cars sold by dealerships in 2022 came from trade-ins, according to the National Automobile Dealer's Association[1]. But how does trading in a car work? And, is it the right option for you?
Potential Benefits Of Trading In A Car
Trading in your car can be a convenient and easy way to move from older to newer. Car dealerships try to make it simple to drive in with one car and drive out with another. Sometimes, the trade-in value of your vehicle can help reduce the sales tax you pay at the end of the transaction because, in many states, you only pay sales tax on the final dollar amount of the invoice[2]. Remember to always consult a tax professional before making any tax-related decisions.
Also, trading in your car may take less time than selling it on the private market, and you don't have to meet with potential buyers to negotiate.
Potential Downsides Of Trading In
Sometimes, the trade-in value of your vehicle isn't as much as you could get through a private sale. Private buyers may pay more than a dealer might for the same vehicle because they don't have to resell the vehicle at a profit afterward.
The trade-in value of your vehicle can make it seem like you're getting a better deal than you are. Some buyers prefer to deal with a straightforward price and take the trade-in out of the equation, so they can negotiate pricing more clearly with dealers.
You may want to think about selling your car privately if you prefer to separate these two transactions and want to try to maximize your cash in hand.
Can You Trade In A Car If It's Not Paid Off?
Oftentimes, it's easier to trade in a car you still owe money on than it is to try and sell it privately. This is because vehicles that aren't paid off have a lien on them. The lien prevents a new buyer from registering the car, truck or SUV in their name. When you trade in a used car, the dealership is able to simultaneously pay out the old loan or lease and restart the new one.
How Trade-ins Work
When it's time to trade in your car, the dealership will first assess your vehicle. They'll look at factors like:
- Mileage
- Condition
- Age
- Style
- Desirability
They'll use these to come up with an appraisal estimating the value of your car. You're usually able to negotiate on this value to make sure you're satisfied with the total purchase price of the new vehicle. Alternatively, you can always reject the offer entirely and sell your vehicle privately, or even go to another dealer to trade it in.
Note, appraisals typically include an expiration date so keep this in mind as you consider the time you need to evaluate and accept the offer. If you accept the offer, here’s what you can expect next.
How Trade-ins Work For Vehicles You Still Owe Money On
The dealer will collect your documents and ask your finance company to send a statement showing the payout on your loan — this is called the payoff amount.
What If The Dealer Pays You More Than You Owe On Your Car?
In this case, the amount of your new purchase will be offset by the remainder.
In this simplified example, we take the remaining money left if the dealer is offering you $10,000 for your car, but the loan is for $6,500:
| Value of the old car: | $10,000 |
| Finance owing: | $6,500 |
| Remainder: | $3,500 |
If the dealership gives you $10,000 for your car, then the numbers look like this:
| Amount disbursed to previous finance company: | $6,500 |
| Amount left over: | $3,500 |
If you buy a $40,000 car, remove $3,500 from that amount, and your new loan amount will be $36,500.
This is a simple explanation, but it helps demonstrate how your trade-in value can reduce the price of your new car, even if you haven't paid the old one off.
What If You Owe More Than The Car Is Worth?
Sometimes, you might not get enough money for your old vehicle to pay out the loan. In this instance, you might be able to roll the old loan into the new one[3]. Let's say you receive $5,000 for your car but owe $7,500. The new vehicle costs $15,000. You will add the difference of the payout amount to the new loan for a total of $17,500.
| Value of old car: | $5,000 |
| Finance owning: | $7,500 |
| Difference: | $2,500 |
| New car value | $15,000 |
| Plus leftover finance amount from old loan: | $2,500 |
| Total new loan amount: | $17,500 |
You may prefer to pay down your current loan before you roll that debt into a larger new loan. You should review the terms and conditions of your current loan as you think about this option. Remember that vehicles depreciate quickly, and it can be easy to end up owing far more than the car you secured your loan with is worth.
When To Consider Not Trading In Your Car
If you owe a lot more than your vehicle is worth, you might not want to trade it in.
If your car isn't worth much, then the offset and benefit of trading it in might be negligible. In that case, selling your car might give you cash for insurance and registration costs towards your new car.
This is sometimes a convenient option rather than using your small trade-in value to offset the cost of the new vehicle.
Preparing To Trade In Your Car
Whether you trade in your vehicle or sell to a private seller, you must prepare carefully. Here's how.
Determine The Value Of Your Trade
First, go to a website like CarFax or Kelly Blue Book to get a rough idea of the value of your vehicle. It's important to also look at similar vehicle listings in your area. Compare the same make, model and year, and try to get a sense of what condition those vehicles are in. Then price yours accordingly.
Clean It Up (and Out)
It's important to present your car in its best light. That means a thorough cleaning of both the interior and exterior. This can help make your car look like new again.
Decide If You Should Make Minor Repairs
Anything easy and inexpensive to fix should be repaired. Minor blemishes are fine but can add up quickly and make your vehicle less attractive. You can polish out small scratches, have the windshield wipers replaced and do the small jobs you've been putting off, like replacing the clip on your door trim. Your vehicle will sell for more if it's in good condition[4]. Repairing those small things will help give a potential buyer, including any dealership considering taking your car in on trade, more confidence in your vehicle.
Gather Your Documents and Get Ready to Negotiate
Now you're ready to trade in. Make sure you have your ownership papers. Also, provide a vehicle maintenance history with receipts so potential buyers know that oil changes and tire rotations have happened regularly. Taking your finance or lease payout letter with you may be helpful.
If you have all those in hand, you'll find it easier to negotiate a quick and easy transaction in your favor. Remember: It's always okay to walk away from a bad deal. If you know what your car is worth and are prepared to negotiate, you can advocate for a higher price more confidently.
Are You Ready For The Swap?
Trading in a car is a common financial tactic for good reasons. It's more convenient than privately selling your car and helps make it more cost-effective to finance a new vehicle. Careful preparation and a strong understanding of your car's value can work to make your next trade-in less stressful. Remember to research your options and make the decision that best meets your needs.
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