How Does a Car Trade-In Work?

What is the car trade-in process? Do I lose money by trading?

Here is how a car trade works.

Car dealers buy your old car from you and give you credit toward the price of a new car. The trade-in 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.

Contrary to some belief, dealers don’t simply “trade” or swap one car for another. It’s two separate transactions rolled into one contract.

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 a higher retail price. That’s how they make their money and stay in business.

It is to a 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 the vehicle themselves, rather than trading it, although it’s more work.

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. Smart sellers will have done their research to know the fair retail value of their car.

Where to find trade-in values and retail values? Online, you can use Kelley Blue Book as a good source of average car values.

Just keep in mind that used car 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. The values of used cars changes often, usually faster than any value guide can keep up.

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

Yes, but watch out. If your loan payoff is less than your car is worth as a trade-in, you are in a good position to trade. The dealer will take your car, pay off your loan balance, and apply the remainder as  down payment credit toward your new car. This remainder is your positive trade equity.

However, if you still owe more money than your car is worth as a trade-in, you are “upside down” and have negative trade equity. Although some dealers may not explain it to you, he’ll take your car, pay off your loan, and will add the negative equity back into the price of your new car, making it more expensive and making for higher payments, not lower payments. It’s called “rolling” part of your old loan into your new loan. It’s like you’ll be paying off two loans at once.

Even if you trade for a cheaper car in this situation, your monthly loan payments could easily end up being higher than before.

Rolling over negative equity from an old car loan 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.  Banks and loan companies don’t like to loan you more money than a car is worth. The only solution is to make a cash down payment to offset some or all of the negative equity.


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The other part of getting a good deal with a trade-in is getting  a discounted price on the new car you are buying. Do your homework and get some online price quotes from services such as Edmunds.com. The quotes are easy and quick to get, so it pays to get multiple quotes and compare them for the best deals.

If you’re looking for a good used car, check out Cars.com which is one of the best and largest online use car shopping sites. They list over 4 million used cars and you can filter it down to just the cars in your area and the price you want to pay.

Don’t let a dealer tell you he’s giving you more than your old car is worth in a trade because you’re probably already paying too much for your new car. The best deals come from getting a fair trade-in price on your old car along with a fair price on your new car.

If you have poor credit or job/income issues, watch out !

Let’s say you have a not-so-good credit score and/or a job that doesn’t produce sufficient income to support new car loan payments. Your dealer will not know if his bank or finance company will approve you but he optimistically assumes it’ll go just fine. So he takes your trade vehicle and lets you drive your new vehicle home. A few days, or even a couple of weeks later the dealer calls and tells you that your loan can’t be approved and that you must return his car. Problem is, that your old trade vehicle has been sold or sent to auction and can’t be returned to you. Now, you have no new car, and no old car. The dealer is obligated to pay you for your old trade vehicle but it still leaves you in an unfortunate situation.

In a situation where you know or suspect that you have poor credit and job/income issues, it’s not a good idea to hand over your trade and drive the new vehicle home. Wait until you hear back from the dealer regarding your loan approval. If you find that you are not approved, you still have your old car to drive.

Summary

The car trade-in process is usually simple and uncomplicated, but it can get tricky when you still owe money on your old car — especially if you owe more than the car is worth.

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