How Does Trading in a Car Work? - Investopedia

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If you're looking to buy a car, you may have an existing vehicle that you'll no longer need. One option is to trade it in at the dealer where you're buying your new car. Here's how that works and how to get the best deal.

Key Takeaways

• Trading in your old car can make buying a new one less expensive.
• If you have a car loan on your old car, you'll need to pay it off.
• You may get more money selling your car to a private party, which you can then use toward a down payment on the new one.

Using a Trade-in to Lower the Cost of Your New Car

If you're buying a car for $20,000 and the dealer will give you $5,000 for your trade-in, your net cost will be $15,000. That's the amount you'll have to pay in cash or borrow in the form of a car loan.

In many states, you'll only have to pay sales tax on the net cost of the new car. So, for example, if your state's sales tax is 8% and your trade-in is worth $5,000, you could save $400 in taxes.

It's worth remembering that when you're buying a car, (almost) everything is up for negotiation, and the value of your trade-in is part of that. If you find that the dealer is giving you more money than you expected for your trade-in, that may be because they are making it up in other areas — a higher interest rate, a higher sale price, etc.

Because of that, some experts suggest not mentioning that you're trading in a car at first. Instead, negotiate the lowest sale price on the new car that you can. Then mention that you'd like to trade in your old car and ask how much the dealer will give you for it. You will most likely need to bring it to the dealer for an inspection.

If you think the dealer's offer is too low, you can always keep your existing car and sell it on your own. There are a number of online resources you can use to determine how much your used car is worth. One well-known source is the Kelley Blue Book at kbb.com.

Bear in mind that if you are trading in a car that still has a loan on it, you'll need to pay your loan off first. Your dealer may offer to pay the loan off for you, but be careful if your old car has negative equity—that is, it's worth less than you still owe on the loan, which may be the case if your car is relatively new.

If, for example, your car is worth $3,000 less than the outstanding balance on your loan, the Federal Trade Commission (FTC) notes, the dealer may "add the $3,000 to the loan for your new car, deduct the amount from your down payment, or do both. In either case, this would increase your monthly payments: not only would the $3,000 be added to the principal, but you would be financing it, too."

One solution to that problem, the FTC says, is "postponing your purchase until you're in a positive equity position. For example, consider paying down your loan faster by making additional, principal-only payments." Another alternative is selling the car yourself and trying to get more money for it to help pay off your loan.

Consider Selling Your Car to a Private Party

The amount of money you'll get by trading in your car is generally less than you could get by selling it to a private party. When the dealer takes your car as a trade-in, they're planning to sell it to someone else. They can't offer you its full value, since they need to make a profit. They may also have to spend some money sprucing up the car to make it more presentable.

Selling your car by yourself is more work (especially if you are still paying on a car loan), but it may be worth it if you have the time. A relatively easy way to reach potential buyers is advertising on one of the major used car websites.

The Bottom Line

Trading in your car with the dealer makes the process a lot simpler, but you'll most likely get less money than if you sold it to a private party. You'll have to decide whether the convenience is worth the difference in price.

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