How Does Trading in a Car Work?

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How Does Trading in a Car Work?

If you’re seeking to purchase a car, you may already own one that you no longer need. One alternative is to trade it in at the dealership where you are purchasing your new vehicle. Here’s how it works and how to get the greatest bargain possible.

Key Takeaways

  • Trading in your old automobile might help you save money on a new one.
  • If you have a car loan on your previous vehicle, you must pay it off.
  • Selling your automobile to a private party may net you extra money, which you may then use toward a down payment on a new one.

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

If you pay $20,000 for a vehicle and the dealer gives you $5,000 for your trade-in, your net cost is $15,000. That is the amount you must pay in cash or borrow via a vehicle loan.

Many states require you to pay sales tax solely on the net cost of the new automobile. If your state’s sales tax is 8% and your trade-in is valued at $5,000, you might save $400 in taxes.

It’s important to remember that when you’re purchasing a vehicle, (nearly) everything is negotiable, including the value of your trade-in. If the dealer gives you more money for your trade-in than you anticipated, it might be because they are making up the difference elsewhere—a higher loan rate, a higher selling price, and so on.

As a result, some experts advise not announcing that you’re trading in a vehicle right away. Instead, bargain for the lowest feasible price for the new automobile. Then indicate that you’d want to trade in your old automobile and inquire about the dealer’s offer. You’ll almost certainly need to take it to the dealer for an inspection.

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If you believe the dealer’s offer is too low, you may always retain your current vehicle and sell it yourself. There are many internet services available to help you evaluate the value of your used automobile. The Kelley Blue Book at KBB.com is a well-known source.

Keep in mind that if you are trading in a vehicle that still has a loan on it, you must first pay off your loan. Your dealer may offer to pay off the loan for you, but be cautious if your old vehicle has negative equity—that is, if it is worth less than the amount you still owe on the loan, which is possible if your car is relatively new.

According to the Federal Trade Commission (FTC), if your automobile is worth $3,000 less than the remaining balance on your loan, the dealer may refuse to sell it “Add the $3,000 to your new car loan, deduct it from your down payment, or do both. In any instance, your monthly payments would rise since the $3,000 would be added to the principal as well as financed.”

According to the FTC, one remedy to this issue is “deferring your purchase until you have a positive equity position Consider making extra, principal-only payments to pay off your debt quicker.” Another option is to sell the automobile yourself and attempt to acquire more money for it in order to pay off your debt.

Consider Selling Your Car to a Private Party

The amount of money you will get by trading in your automobile is often less than the amount you would receive by selling it to a private party. When you trade in your automobile, the dealer intends to sell it to someone else. They are unable to provide you with its full worth since they must earn a profit. They may also need to spend money tidying up the vehicle to make it more attractive.

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Selling your automobile on your own is more effort (particularly if you are still paying off a car loan), but if you have the time, it may be worthwhile. Advertising on one of the big used vehicle websites is a pretty simple approach to contact prospective customers.

The Bottom Line

Trading in your automobile via a dealer simplifies the procedure, but you’ll probably earn less money than if you sold it privately. You must evaluate if the convenience is worth the price difference.

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