First Car Guide for First Time Car Buyers

Many people choose to trade in a car when buying or leasing another car. But how does the trade-in process work?

Here is how. Car dealers buy your old car from you and give you credit toward the price of a new car. The credit is like a down payment and reduces the price of your new car, making your monthly payments smaller. The dealer then puts your old car on his used-car lot to sell, or he sends it to a dealer car auction where another dealer will buy it to put on his own used-car lot.

Dealers make a lot of profit on selling used cars they've taken as trade-in. They pay the trading customer a low wholesale price, and sell the car for retail price. It is to the dealer's advantage to pay as little as possible to the trading customer. Therefore, smart customers will have already done research to determine the fair wholesale value of their trade-in vehicle.

Since dealers only pay wholesale value for trade vehicles, customers can make more money by selling their vehicle rather than trading it. The money from the sale can then be used as a down payment on a new vehicle, reducing payments even more than if they had traded.

Where to find trade-in values? Online, you can use Kelley Blue Book as a good source of average trade-in values. Just keep in mid that trade-in values are not absolute and can vary widely between dealers, different parts of the country, and a dealer's interest in the vehicle.

What if you still owe money on the trade vehicle? Can you still trade it?

Yes, but watch out. If you still owe more money than a dealer is willing to give you trade credit, you are "upside down" and have negative trade equity. Although some dealers may not explain it to you, he will add the negative equity into the price of you new car, making it more expensive and making for higher payments. It's like paying off two loans at once. It is almost guaranteed to put you into an immediate upside down situation with your new car.

Sometimes, if you have too much negative equity in an old loan, you may find it difficult to get a new loan.  The solution is a large down payment to offset some of the negative equity.

The other possibility is that you have postive equity -- the difference between your outstanding loan balance and the trade-in value of your car. In this case, the positive equity is subtracted from the price of your new car, making for lower payments.

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