How Does Trading in a Car Work?

What Is a Trade-In?

A trade-in is what your current vehicle is called when you're selling it to a dealership as part of the deal to get a newer car, truck, or SUV. As a trade-in, the value of your vehicle is used as a whole or partial down payment to lower the amount of financing you need on your next purchase. When you use a trade-in, you may still combine that amount with cash to increase the amount you're investing in your next loan.

Step-by-Step: How the Trade-In Process Works

Here's a step-by-step guide to help you navigate the trade-in process.

Step 1: Get Your Car Ready

When it's time to trade in your vehicle, you can't just take it to the dealership as is, you have to put in a little elbow grease first. The first thing you should do is totally empty your car of personal possessions and clean the interior thoroughly. If you don't want to do the work yourself, getting the vehicle detailed before heading to the dealership for an appraisal is a good practice to get the most bang for your buck. Take care to fix any minor issues that could bring down the value of your vehicle, like small dents and scratches, and run it through a carwash, too. Gather all your relevant paperwork, service records, and your title if you have it.

Step 2: Find Out What Your Car Is Worth

Once your vehicle is clean and ready for appraisal, you should first get an estimated value from a website such as Kelley Blue Book or NADAguides. These valuation websites ask you to fill out a questionnaire about your vehicle, including the year, make, model, and condition. It doesn't do you any good to lie on these forms to get a better number, since you will only be hurting yourself. It's always a best practice to be as honest as possible when it comes to your vehicle's condition. Once you get an estimated value, you will know how much you can expect to get from a dealership.

Step 3: Visit Dealerships for Trade-In Offers

Now that you know how much your car is estimated to be worth, you can take it to a dealership to find another vehicle and trade in your current car. Remember, the estimated value you got online is a reference to be used as a baseline for what a dealer may offer. The actual cash value, or ACV, of your vehicle is what a dealer is willing to pay you. One thing that is a good practice is to rate shop when you're looking for loans, and also get at least three appraisals from different types of dealerships. Make sure to visit both a franchised and an independent dealership to compare trade-in amounts. This way, you can choose the offer that works best for you. If you aren't getting offers that live up to your expectations, it's a good idea to find out why and fix the issue if possible.

Step 4: Negotiate the Trade-In Offer

Now that you have an offer from a dealership, you can compare it to the offer you received online, and then you can negotiate the best amount for your situation. Remember, the goal for a trade-in is to use the value from your car as a down payment on a new vehicle, so getting the most bang for your buck is key.

Step 5: Finalize the Deal

Once you find the vehicle and the loan that meet your needs, you can trade in your current vehicle for the new one. The new vehicle should be a better deal when you use the equity in your car to lower your new loan amount. Make sure you go over your contract very carefully, and ensure that there are no hidden fees or unwanted add-ons. Then sign your loan paperwork and take delivery of your car.

Factors Affecting Trade-In Value

Several things go into the appraisal and valuation of your vehicle, and a lot of its value depends on the year, make, and model of the car. Vehicles are depreciating assets, which means they lose value over time. The older your vehicle is, the more depreciation it has likely seen. Cars tend to lose around 20% to 30% of their value in the first year of ownership, and lose about the same amount of value over the next five years, barring anything happening to the car. Older vehicles have a lower trade-in value as a result.

Additionally, if a car has a lot of miles on it, it may not be worth as much. This is a universal condition: the more miles on the car, the more wear and tear on the engine and assorted mechanical parts.

Although depreciation and mileage are big factors in assessing the value of a vehicle, there are some makes that are known to hold on to their value better than others. Vehicles from makers like Toyota, Subaru, and Honda, which are consistently ranked among the longest-lived vehicles by Consumer Reports, are often considered more profitable as trade-ins.

Other factors that come into play are:

• Vehicle condition – The better shape your car is in, the more profitable it is likely to be for you. This is why it's a good idea to do a good once-over and fix any minor issues before attempting to trade in your vehicle.
• Service history – A car that has its maintenance records and service history with it may be more highly valued than a car whose record of oil changes is spotty.
• Vehicle features – A higher trim vehicle, or a car with more special features and packages, is likely to appraise for a higher value than a base-model vehicle.
• Market demand – Market demand is something that fluctuates, but if you have a car that's more highly valued for a certain reason, like an AWD SUV in a snowy climate, or a Hybrid vehicle when gas prices are high, you may be able to take advantage of it's features to garner a higher trade-in value.

Tips for Maximizing Your Trade-In Value

When it's time to trade in your vehicle, it's a good idea to do what you can to get the best price out of your trade. This is why it's important to shine up your car as much as you can. This means cleaning it inside and out, fixing any minor issues, dents, or scratches, and replacing anything that needs it, as long as it's a good investment. Things like burnt-out bulbs, low fluids, and worn wiper blades should be addressed before you take your vehicle for an appraisal. But, things like bald tires, which can bring down the value of your trade, can be expensive, and a dealership may be able to replace the tires for less than you can, so you may not want to do it.

Another major thing that can help is to provide the service records for your car. Having this can show a dealer that the vehicle was well cared for, and might get you more money for your trade.

Pros and Cons of Trading In a Car

Pros:

• Fast and convenient – When you're trading in your car to a dealership as all or part of your down payment, the process is typically straightforward, and faster and more convenient than trying to sell it yourself.
  
• No need to deal with private buyers – If you're trading in your vehicle, then you don't have to deal with private sellers, or the hassle of going to the bank and DMV with the new owner to transfer the title and get the paperwork done. It all can be done through the dealership, making this a much smoother process than a private sale.
  
• Sales tax benefits in some states – In some states, it's beneficial to trade in a vehicle, since you only have to pay taxes on the difference between the new car price and the trade-in value. This means if you're trading in a car worth $12,000 for a vehicle worth $30,000, you only have to pay taxes on $18,000 in most states.
  

Cons:

• Typically get less than a private sale – When you sell your car privately, you can set the price and strive for a much higher price than you're likely to get at a dealership. A dealership may not offer as much since they're taking on the brunt of the paperwork and transferring the titles.
• A dealership may underbid your car’s value – Since dealerships are focused on profit, they may make lower offers on trade-ins to be able to sell them for a higher price. They may also take into account the fact that they'll have to spend a little money on cleaning or repairs, so they factor that into their offer price.