How does trading in a car work? Overview, and General principles

how-does-trading-in-a-car-work
how-does-trading-in-a-car-work

You may have an existing vehicle that you no longer need. One option is to trade in your car at the dealer where you intend to buy your new car. So, you need to understand how trading in a car works and how to get the best deal.

Swap out your current vehicle at a dealership might not be the best option for everyone, but it can be an easy way to part with it, especially if you’re looking to buy or lease a new or used car.

Essentially, you are selling your used car to the dealer and the amount they pay is deducted from the value of the vehicle you want to buy.

In this article, we will show you how to trade in your car and explore the pros and cons of trade-ins.

Why should you trade-in your car?

It can be difficult to part with your vehicle, especially if you’ve had it for a long time. However, there will come a time when it will need to be replaced.

One of the easier ways to do this is to trade it in at the dealer where you will buy your next car. There are many advantages to this.

It’s quick and easy
To start the process, all you have to do is go to the dealer you want to buy or lease a new vehicle from and tell the car salesman that you want to trade in your old car.

From there they take control. After a test drive and appreciation, the dealership employee will make you an offer.

You can sell your car yourself. However, a private sale is a time-consuming process. Marketing the vehicle is your responsibility.

You’ll also need to show it to potential buyers for evaluation, negotiating the price, and doing the paperwork to close the sale and transfer the title.

You will pay off your existing loan
You can trade in a vehicle even if you still owe money on the loan. In fact, it is common for traders to take care of consumer legacy funding.

You pay off the remaining credit balance on your trade-in and receive the title of the car directly from the lender.

If you have positive equity in the vehicle, it will be used as a down payment on your new lease or purchase agreement.

You can even sell your vehicle at a dealer if you have negative equity. Negative equity means that the amount you owe is greater than the value of the model.

The dealer takes care of the paperwork
Selling a car requires a lot of paperwork. If you sell your car in a different state than it was registered, or if you live in a different state, things can get even more complicated.

However, if you hand in your used vehicle to a dealer, they will take care of the paperwork for you.

You know which documents have to be submitted to which DMV. All you have to do is sign the papers, but you pay a document fee to do so.

You can save on sales tax
A major benefit of trading your car with a dealer is saving you money on sales tax. In many states, the trade-in value can be deducted from the price of a new car.

It’s important to do some math to determine if the sales tax savings you could get by trading the car are greater than what you could get by selling yourself.

Why you should not trade in your car?

After considering the benefits of trading in your car with the dealer where you will buy your next car, let’s look at some shortcomings as well.

Selling your car to a dealer is convenient, but it may not always be the best way to get the best value from your used vehicle.

You may get more money selling your used car to a private party or other dealers.

You don’t get a top dollar
If you trade-in your car at a dealer, you will likely only be offered the wholesale value of the vehicle, which can be significantly lower than what you can get if you sell it to a private individual.

If you want to get the most money out of your used vehicle and have confidence in your sale, consider selling it yourself.

It adds confusion to the deal
Every auto business has three key components: the price of the vehicle, the trade-in, and the terms of the car loan or lease.

In most cases, sellers want to bundle them up and sell you for the amount of the monthly car payment. This is a great way to sell a vehicle, but it can be excruciatingly confusing for buyers.

They do this by reducing your trade-in value. Alternatively, they can offer consumers a cheap price by increasing the price of a new car or the financing price.

With so many numbers floating around, it can be difficult to gauge the true value of a trade-in offer.

When you are heavily underwater in the car
If you owe more than its worth on your vehicle, you have negative equity, your credit is upside down, or you are flooded.

In this situation, it makes less financial sense to trade in your vehicle at a dealer.

If you can’t sell your current car and use that money to pay off your existing loan, the money will have to come from elsewhere to repay it.

Which should I do? Trade-in or leasing

Contrary to popular belief, there are a few ways that trade-in and leasing can work together.

In addition to using your lease for a lease, you can trade-in or sell your leased vehicle for more than its residual value.

Can I trade in my car?

Definitely, and you can end up with a lease that won’t cost you a lot of money.

By using the cash received from a trade-in as a down payment on a lease, you can reduce the size of your monthly lease payments, the amount due when you sign, or both.

Car buyers pay the entire negotiated price of the vehicle. They usually get a car loan from a lender to help finance their debt due on the purchase.

However, leasing customers only pay the depreciation accruing during the term of the contract plus interest (called “money factor” in leasing) and fees.

This amount is split into a deposit and a series of equal monthly payments. After the end of the lease, the vehicle is usually returned to the place of origin of the contract.

Some leases allow you to take the vehicle to another brand new car franchise dealer.

Can you trade in a leased vehicle?

Yes, but it’s rarely a good idea to trade in a leased vehicle. The experts who forecast the residual values ​​of leased models usually make accurate estimates.

However, there are times when such a trade can work for you. If the trade-in value of your vehicle towards the end of the car loan is significantly higher than the purchase cost of your lease, you can trade-in your leased vehicle (or sell it yourself), pay off your contract, and use the cash as a down payment for your next car.

The best chance that a trade-in price is higher than the buyout costs is if you have significantly lower mileage than the lease allows, the dealers have a high demand for the vehicle and there is no damage.

Even then, you can usually get more money out of a private car sale, so you may want to try selling the car yourself and get the highest resale value.

Check with your leasing company to make sure that there are no sales or trading bans on the vehicle.

How to trade in a car

When you sell your car to a dealer, sell it to them and hope that you get the best possible selling price. Many of the preparations are the same as for a private sale.

An important benefit is that you usually don’t have to have the car repaired first. The dealer takes over the repair work.

Here are a few tips to help prepare your vehicle for trade-in:

1. Gather your papers

While you don’t have to overhaul your car to trade it in, it is worth it if you can show you have kept up with preventative maintenance.

You should have your service records in one place and copies of receipts to prove that you looked after your car.

It’s also a good idea to show receipts for things like tires and brakes so you can show if you’ve recently replaced them. All of these can increase the amount that you will receive as part of your trade-in offer.

If the vehicle has been involved in an accident, prepare to provide the appraiser’s records of the repairs carried out.

You might not ask about the paperwork, but if you’re prepared, you can land a sweeter deal.

2. Clean up

There is no rule of how much cleaning is required. Leaving a few things in the car can be a good thing. One benefit is that you can take the car home for cleaning while you consider an offer from a dealer.

For every trade-in offer that you receive, the costs for the refurbishment are already included, even if you have already refurbished the car.

Even so, there’s no harm in washing it, throwing away the fast-food packaging, and vacuuming the inside.

You will also want to clean up your car’s tech. Delete your home address and all destinations from the navigation system.

Disconnect your mobile phone from the vehicle’s Bluetooth connection and delete your call history.

Contact any data connection provider and let them terminate the data connection. If you’ve already paid for data or a satellite radio subscription, you may even be able to get some of the money owed back.

If your car has a Homelink transmitter that is set up to open your garage door or gate, please refer to your user manual to find out how to delete the system so that there is no longer easy access to your house.

You don’t want an unscrupulous buyer to find your home address in the navigation history and access your garage via the Homelink transmitter.

3. Determine if you still owe money on your current car

Your car loan may be upside down or you may have negative equity. When you have negative equity, you owe your car more than it’s worth. In these cases, you may still be able to trade in your car.

But the balance of your old car loan could be poured into your new car loan, which can add to your monthly payment and potentially turn you upside down even more.

4. Get a price from multiple dealers

Getting multiple estimates will help you get the best price. You can get estimates from the dealer you want to buy your vehicle from, as well as other dealers who sell the make and model of your car.

For example, if you own a Toyota, your local Toyota dealer may be willing to buy your vehicle back from you.

Consumer Reports also suggests taking the vehicle to a used car dealer as they are often looking for well-maintained, low mileage vehicles.

Pay close attention to special offers from the retailer and read the fine print carefully. Some can guarantee a certain value for your trade-in, even if it is in poor condition.

Others can claim to repay your loan no matter how much you owe for it when you trade-in your car.

But if you’re underwater, they can easily roll over your negative equity to your new car loan.

Do your research and ask the right questions when an offer seems too good to be true.

5. To repair or not to repair

When preparing for a private sale, it can be worth considering beforehand what damage needs to be repaired or serviced.

There may be a deduction for parts on your car that need to be repaired, but since the dealer pays less than the retail price for repairs, each deduction is usually less than what you would pay out of pocket to repair yourself.

6. Get to know the value of your car

It is important that you know the approximate resale value of your car before driving to the dealer.

If you don’t, then there is no way to know if you will get a fair deal or a low estimate.

7. Pay for these parking tickets

Selling or exchanging a car does not cause unpaid parking tickets to go away, and an unpaid ticket could prevent the transfer of ownership.

In some areas, unpaid parking tickets are given to debt collection agencies who collect payment from whoever owned the vehicle at the time of the breach.

8. Negotiate your trade-in price

You don’t have to accept the dealer’s first offer for your trade-in vehicle. You can make a counteroffer with a higher exchange amount. Dealers often start with a low ball offer.

And if you plan to buy a new car from the same dealer that is buying your old car, make sure that the dealer doesn’t raise the price of the new vehicle to offset the trade-in amount they gave you.

9. Close the deal

Once you’ve agreed on a price for your trade-in, it’s time to get the deal closed.

If you buy a new vehicle from the dealer and receive credit for the trade-in value, make sure that this is clearly stated on your contract and that the correct amount has been deducted from the price of the new vehicle.

If you’ve sold your car to a dealer but don’t buy a new one right away, you will likely receive a check for the value of your trade-in to use as a car deposit there or elsewhere.

What to expect from the dealer

Once you tell your seller that you are trading in your car, someone from their used vehicle department will review your deal, test drives it, and prepare a quote.

They may be running a vehicle history report and you want to be prepared for any questions they have after graduation.

Most used vehicle appraisers are experienced. They are able to spot problems that you may not be aware of. However, if they suspect a problem, it may be worth asking a trusted mechanic for a second opinion.

You don’t want the dealership to put you down on you because of this problem that may not even exist. You can also do a quick web search to see if your model is having the problem.

There are several things that the dealership’s used vehicle appraisers will examine:

Vehicle age: The value of a vehicle usually decreases with age. This is especially true if a new generation model has hit the market since your last purchase.

Mileage: The resale value of a vehicle also tends to decrease the more it is driven. Estimates are usually based on 10,000 to 12,000 miles per year. If you’re way above that, your worth will take a blow. The upside is that if you’re well below average mileage, you may get a higher payout.

Ownership: Single-owner models tend to be more valuable than multi-owner models. The vehicle history report shows the dealer how many owners there were.

Vehicle condition: If a vehicle looks neat, it is worth more if it is resold at the dealer. If a serious overhaul needs to be done the dealer will have to pay for it and their listing will be lower to accommodate these additional costs.

Suitable tires: Do all tires fit together and do they still have a good tread life? Answer yes and it will be positive for your car’s value. Answer no and the appraiser can include the price of replacing the tires in the value of the vehicle.

Options and Add-Ons: If your vehicle has factory options it is more valuable than a base model of the same car.

Reviewers also review any equipment you’ve added and can increase or decrease their offering based on their results.

Mechanical condition: the appraiser will look and listen carefully to get an idea of ​​how the vehicle is running.

If they suspect a problem, they’ll likely just knock some of the value off the car instead of taking it to the repair shop for further diagnosis.

They’ll also be on the lookout for a recent vehicle inspection or smog check to make sure there are no costly repairs to come.

Seasonal demand: Different vehicles are in greater demand at different times of the year. For example, if you are trading a convertible in December, you are unlikely to get a good deal.

All the dealer sees is a car to sit on until spring or sell at a discount. On the other hand, trading in a four-wheel drive SUV in early winter can make it pay more than it would in summer.

Paint Color: While this fuchsia paint job was all the rage when purchasing the car, it limits the number of interested buyers. Classic, neutral colors sell best as used cars.

To determine the value of your vehicle, the appraisers only look at the car. Whether you have negative equity or an upside-down loan, what your credit standing is and what new or used car you are considering shouldn’t affect the payoff of your trade.

While this process can take some time, it can help you make the most of your money trading your car – it can be worth thousands of dollars, after all.

Alternatives to trading in your car

Exchanging your car for a new one is a hassle-free way to dispose of your old car, but it’s not the only way to dump it.

If you want more cash than the trade-in value offered by the dealer, consider one of these other ways to get rid of your car.

1. Other car dealers
If one dealer can’t give you the trade-in value you want, maybe someone else can.

If your vehicle is in good shape, has a collision-free history, and doesn’t have many miles on the odometer, you can get a better estimate by selling it to a franchise of its own brand.

For example, try selling your three-year-old Hyundai to a Hyundai dealer as they can resell it as a Certified Used Vehicle (CPO) while another brand of the dealer cannot.

It is a good idea to check out dealerships where the car you are buying is not as popular as in other areas.

Likewise, you should try selling your used car to a dealer who likes the model.

Instead of selling your Ford F-150 to a dealer in the city who will resell it at the next auction, for example, take it to a rural area where the dealer can get good money for an F-150 on their property.

Before heading to different dealerships, call their used car managers to measure interest in your vehicle and make an appointment to have your car valued.

Showing up without notice on a busy weekend is not a good idea as a staff is focused on selling cars.

2.  Used Car Superstores
Another option for trade-ins is the used car supermarket. They are relatively new but have streamlined processes for buying used cars.

Your trading may not make you as much money as selling it itself, but the advantage of superstores is that they are quick and easy.

You can also eliminate the trade-in negotiation of used vehicles from the process of exchanging your new vehicle. You can let the dealer focus on the cost of your new vehicle.

3. Sell yourself
When you sell a used car yourself, you usually get the highest price. However, since you are responsible for everything, private sales usually take more time and effort than the other methods.

You need to list the car, show it to potential buyers, and decipher all of the paperwork a dealer would take care of.

If you are underwater with your current car loan, selling your car in a private sale is the best way to go as you have a much better chance of getting a price closer to the positive equity range.

Before doing this, speak to your lender so that you know all of the steps it will take to properly close the sale and pay off your loan.

4. Instant cash offer
A new alternative to trading that doesn’t sell itself is an instant cash offer. These easy-to-use online services allow you to enter information about your cars, such as Make and model as well as mileage and accident history.

Usually, you will receive an offer from an interested dealer within a few minutes.

5. Donate your car to a charity
If all you want to do is get rid of a lump that is taking up space in your driveway and you don’t expect to make big bucks selling it, consider donating it to a charity.

You may be able to get a small tax deduction knowing the vehicle (or its junk value) has helped others.

What do you need to trade in a car?

As you find the best deals on your trade-in, collect all related documents and accessories, including:

  • Vehicle registration
  • All vehicle keys
  • Vehicle title (also known as a pink slip of paper)
  • Payout of the car loan plus account information
  • Maintenance logs and receipts (not necessary, but very helpful)
  • Original operating instructions
  • Pay for all outstanding parking tickets

Things to Avoid When Trading a Car

  1. Make a dirty trade-in. A clean and fresh-smelling car brings more to the dealership than another that is full of dirt.
  2. Not knowing what your car is worth. Do your homework and let yourself be assessed how much would be a fair exchange value so as not to be ripped off.
  3. Over-repairing your car – Avoid spending thousands of dollars, especially on a car that is unlikely to make a lot of money.
  4. Failure to provide all accessories. Dealers prefer vehicles with all accessories.
  5. Incorrect information when applying for a trade-in.

Conclusion

Trading your car at 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.

When you’re done negotiating your car contract and trade-in, carefully review the contract to make sure that all of the agreed terms are in writing.

Then, a few weeks after the deal is closed, check to see if your loan is paid off. The lender should also send documents in the mail that the loan has been paid.

References

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