Trade-in is a magical thing. It lowers the cost of a new car, gets rid of your old car, and puts valuable chips in your pocket. The only question is, how does a car trade-in work?
How does car trade-in work? In this guide, we’ll kick off the curtain and tell you everything you need to know about car trading. We’ll cover the frequently asked questions, describe each possible scenario, and give you some tips at the end.
What is Car Trade-in?
As the name suggests, trade-in is when you give your car to a dealer in exchange for some money. By trading cars, you can cash out many different benefits.
Where does the trade-in take place?
What should I pay attention to when trading in a car? Trade-ins are carried out almost exclusively through dealers. Private sellers have the opportunity to accept trade-ins, but this is much less common.
This is all thanks to the trade-in structure, which we’ll cover later.
Who is a good car trade-in?
For a lot of people around the world, a trade-in is the right choice. This program is especially useful for people who want to buy a new or used car and have a reasonable car.
If you already own or are paying for a car, then you are a potential candidate for a trade-in.
If you’re buying a new or used car and want to save some money and get rid of your current car at the same time, this could be the best option for you.
Before leasing actually begins, trade-in is the preferred method for the vast majority of Americans. You’re handing over old keys to reduce the price of a set of shiny new wheels.
Unfortunately, this program is not available for people who wish to rent their next car.
Learn about trade-in value
When you drive your car to the dealership and shake hands for a trade-in, the dealer is paying you what is known as the car’s “trade-in value.”
This is the amount that the dealer “paid” for your car. Don’t get confused though, they don’t actually give you a stack of money. They deduct from the money you owe them for their new car.
Here’s a simple example: you drive your current car to a dealership. You’re going to spend $30,000 on a hot hatchback. The dealer says your car is worth $10,000 to them. The £10 is the trade-in value of the car.
After writing a reduced check for $20,000, you’ll leave your current car at the dealership and drive your new hatchback.
The time to trade the car
If you’re curious, here are some great times to trade cars. This section will discuss the time of year, the time in your life, and some other factors that change over time.
Make sure your car is done
The only time you can trade in your old for a new one is after you’ve used up your car. You are essentially selling the car directly to the dealership, so you will lose ownership of the car.
When an owner is tired of their current car for some reason and wants to drive a new one, almost every trade-in is done.
Do it in the right season
How does car trade-in work? Rumor has it that the best seasons for car trading are spring and summer. Historically, car dealers have had higher sales during these seasons, so they’re willing to spend a little more for your trade-in.
What to pay attention to when trading in a car: pay attention to mileage
If you have less mileage in your car, the dealer will give you more money. If it fits your schedule, it’s always a good idea to trade your car before you accumulate miles. This is the case if you’re looking to get the most potential trade-in value.
On the other hand, you can also drive the car into the dirt before trading.
You’ll see the depreciation of the car gradually decrease after about a decade and then slowly drop to $0.
At the end of your car’s life, the value won’t fluctuate too much. A $5,000 15-year-old car may only fall by another $1,000 in the next 5 years.
This means that if you want to sit in your car and drive it for as long as possible, this is a very effective idea.
Avoid upfront fees
Some loans have a rule that doesn’t allow you to pay off the car early without charging a fee. If you trade in within the first 5 years, you may have to pay an upfront payment and a penalty.
If that’s the case, then you might want to postpone trading cars.
Something you need to trade on a car
There are a few things you need to bring with you before you officially trade in your car.
- car. Well, it seems obvious, but we need to point out. You can’t trade a car that a dealer can’t see and test drive in person. If your car is parked in your driveway while you’re at a dealership, they won’t accept trade-ins – no matter how many selfies you have.
- Loan details. You need to know who your lender is, how much money you owe, account information, and the term of the loan.
- Driver’s license. This one is simple. First, you will need it to drive to the lot.
- Car keys and keys. Once the trade-in is complete, the keys, remote, and keychain will go to the dealer. Make sure they have them, otherwise the transaction may be canceled, or they may charge you extra to replace these.
- Proof of insurance. If your car is not insured, the dealer may refuse. Insurance also proves that you own the car.
- Vehicle registration. In any case, the registration should be in the glove box, but you will need to use it at the dealership. They will use it to confirm that the car is indeed yours.
There are two types of trade-in
We’re about to talk about a number of different trade-in types, but they all fall into two broad categories:
Swap in the underlying stock. This is when you owe less than the value of the car. If you owe $1,000 to the loan company and your car is estimated to be worth $5,000, then you’re looking for a positive equity discount. This means that you are ahead of the value. And that’s a good thing.
Negative equity trade-in. The opposite is true for negative equity discounts. This is when you owe more money to a car than it is worth. Owing $3,000 on a $5,000 car means you’re upside down (or in trouble) $2,000. It also means that you are at a disadvantage in the negotiations. This is a bad thing.
How to do a trade-in
For a positive equity discount, the process is very simple. However, it depends on how many cars you own.
If the car pays off completely, then you will have more power in this position. If you’re still paying, it’s not the end of the world.
How does car trade-in work? Transaction of a car that has been paid off
The simplest trade-in is when you own the car outright. The ownership is in your name and you don’t owe anyone a vehicle.
When you arrive at the dealer, it’s a valuable bargaining chip. It can be used to provide a better deal for your new car.
In this option, you don’t have to deal with the lender at all, and you can skip a few calls. You can also get better off unfavorable trades.
You’ll drive your current car to the lot of your choice and let the salesperson know you want to trade it in. Also, let them know that you own it completely so they can ditch the gimmick.
Trade the car you’re still paying for
If you’re still paying, it’s not a big deal. You can still drastically reduce the list price of your dream car.
You will only be able to get a discounted value that matches the car asset you own. That’s because you still owe the balance until the car is officially yours.
Some dealers will work with your lender and make all the necessary calls, but others will let you play with phone labels to fix everything.
The dealer will transfer the ownership and loan to their name. This makes things a little confusing, so you have to keep an eye on how the numbers work. Here’s an example:
You want to buy a new Lexus RC worth $42,000 from a dealership. Your Mazda3 currently has a car loan.
According to the Kelley Blue Book, your Mazda3 is worth $15,000, while you owe $6,000 on your loan. This means that you actually own $9,000 worth of Mazda3. This amount is a positive equity to your car.
Mazda 3 2014
After inspection and negotiation, the Lexus dealer offers you a $5,000 trade-in for your car. Once accepted, the dealer will transfer the title and loan to their name. In most cases, they immediately pay off the remaining $6,000 owed to the lender.
Why are they doing this? Well, now they have a Mazda3 worth $15,000, and technically, they’re only paying $11,000.
The value of the trade-in is used to buy a car that they are already making money on. You’ll have to ask their bookkeepers, but there’s a good chance they’ll get ahead of the curve on this deal. This is true of almost every transaction they make.
The value of the trade-in is essentially a gift card for their dealer.
How to do a negative stock trade-in
If your loan is upside down, you should probably postpone the vehicle transaction. It’s just an option for people who want to shrink their car down to a cheaper option.
In fact, it gets rid of the nasty loan that hangs over your head while you still have a car to drive.
For most people, a negative equity discount is a last resort. The new payment terms, interest, and prices you get will be disadvantaged. In the eyes of dealers, they need to overcharge you to protect themselves in case the buyer also becomes disgusted with the new car.
We’re not saying you can’t trade in if you have negative equity, we just recommend that you think about the situation first. If you’re in trouble and urgently need to get out under your car, this might be your only option.
Still, we recommend cutting back on expenses and buying a much cheaper vehicle than what you currently own. It might be a good idea to buy an older car like the Camry or the Civic (which refuses to die).
Honda Civic 2006
In a trade-in world of negative equity, there are three options:
What to pay attention to when trading in a car: rolling balance
A common option is to roll forward a negative balance. Let’s say your car is upside down by $5,000. You get a new car with a list price of $10,000.
You can trade in your car by simply adding $5,000 to the final price of the new car you get.
Under normal circumstances, this is not a good idea. This means that you are overpaying the fare. In extreme cases, you may need to keep your head above water.
For those in such situations, we highly recommend that you find out how much you can afford a car. Registering a new car that you can’t afford can force you to turn it upside down again in the future, creating a nasty cycle.
Delayed transactions
Once you’re enthusiastic about a new car, it can be difficult to hit the brakes and delay the trade-in. However, if you are already in the loophole of the current car, then it is better to kick the “new car” into the road.
If you can wait long enough for your car equity to be corrected, you won’t have to worry about the issues associated with negative equity discounts.
Keep in mind that you don’t have to wait until the car is fully paid off. You just need to catch up so you can do a positive equity swap (instead of negative equity).
Make up the difference
This is a very rare case, but one worth mentioning. If you have cash on hand to pay the difference in your current loan to keep it up to date, then you can do so.
What does this mean? If you owe $10,000 to a car and the dealer will give you $7,000 for a trade-in, then you will pay $3,000 to the loan company and trade in your car.
This works with the assumption that you have enough money to reduce the trade-in value of the car.
Trade-in alternatives
If you’re not fascinated by what you’re reading so far, don’t worry – there’s another option besides car deals: private sales.
If you sell your car to a private buyer, you’ll make more money on the deal. Private sales are available whether you own the car outright or are still paying for it.
The process takes longer, is a bit tricky, and has more chances of getting scammed and scammed. Even so, if you don’t like the idea of trade-in, it’s a viable option and you should move on to the discussion.
Auto Trading Tips
Once you’ve made up your mind, you need to be ready to trade your car. The process can be a bit tricky, so doing some homework ahead of time will help you a lot. This section is about tips to make sure you’re prepared.
Understand the value of the car
We can’t stress this idea enough. You need to know how much your current car is worth. It’s not how much you think it’s likely to be worth, or how much your friends say it’s worth.
There are dozens of platforms online, all of which revolve around getting you to make a reasonable estimate of your car. Kbb.com is the largest and probably the most reliable source. They have a free trade-in estimator for you to use.
They will need information such as your location, mileage, year, make, and car model. They will also ask for sub-models, additional equipment, vehicle colors, and vehicle condition. You have to be honest about each of these issues, or you will be evaluated unfairly.
Random data inserted into the 2020 Audi A4 shows us that our fake car is worth $29,217 at trade-in and can sell for $33,336 at a private sale.
Audi A4
Now, we can go to the dealership with that number and make sure we’re getting a fair trade-in value.
Again, if you’re still paying, you’ll have to deduct from that value. If we still owe us $10,000 in loans, the trade-in value will only be $19,217.
Check your credit
Your credit score will affect the final deal you get from the dealer. You can’t improve your credit score in the short term, but it’s good to know your score.
A higher score means you’ll get a better deal, lower interest, and the dealer will be more helpful. If the score is low, you’ll either need co-signers or just have to deal with the bad deals they offer you.
Clean and refine your car
Well, we get it – you don’t sell this car to a who is easily distracted by a shiny hood and a clean interior. Still, it’s a good idea to clean and detail your car.
Why? It’s all about the demo. If the car looks completely clean and polished, the dealer may assume that you have maintained the car perfectly since you owned it.
If they open the door and the McDonald’s wrapper falls out of the car, they may make you stiff on the price. In addition, they may add hidden details and cleaning fees to eventually rectify the situation.
In any case, the car wash and complete details will not be too expensive. For something that can save you hundreds or thousands of dollars, it’s worth checking out.
Be prepared to say no
If the deal is not good, then you need to be prepared to say no and walk away. Dealers can only make money if they offer you a bad deal and charge exorbitant fees to the person who buys your trade-in car.
The salespeople are really smart and can be sneaky. When you’re really scammed, they can pretend you’re getting a lot.
If you can walk away, you’ll get the best deal.
Get different offers
Nothing is exclusive to dealers who offer discounts. In fact, you can estimate your trade-in by email or by calling dealers across the country. If a dealer several out of state offers you an incredible deal in writing, then the trip might be worth it.
At a minimum, there are three different offers available for trade-in. This helps you make a good comparison to see if any dealers are trying to scam you.
Read anything before signing
Going back to the whole “salespeople can sneak around” point, you need to read everything before signing off. In most states, the law says that signatures are legally binding. Signing also means that the signatory has read the contract completely and agrees to everything.
If you don’t read the contract, there’s no rhetoric.
A salesperson can tell you one thing, while a contract can say something completely different. This could be an accident or it could be intentional. Either way, the contract has the final say. The terms, prices, and structure outlined in the contract are what you agree to.
If you don’t read carefully, they may enter the wrong trade-in value and overcharge you for the vehicle.
If you need to look at the small print, take out that magnifying glass
Pay for those damn parking tickets
If you’re trading in a car, unpaid parking tickets won’t go away. Before transferring ownership, you need to make sure that each ticket has been paid for. If you have an outstanding balance on your ticket, the dealer may not be able to transfer ownership at all.
Repair the damage or pay (literally)
How does car trade-in work? It’s not a threat, it’s something to remember when you’re there. If your cars are damaged, they need to be repaired, or the dealer will lower your trade-in assessment.
When they reach their final trade-in value, it will consider any damage they need to repair in person. In addition, yes, they inflated the price of the estimated repairs. The dealer estimated that it might cost $40 for a single oil change worth $200.
It’s usually cheaper to repair your car before you trade it in. At the same time, if you don’t care that your trade-in value is cut a little, then you can deal with it directly.
Things to look out for:
As your ultimate safety net, we’ll tell you some common things to look out for. Be mentally prepared for these so as not to be caught off guard.
You may (might) become low-key
Becoming low-key is almost a guarantee. Dealers need to get ahead of the curve so that their doors can stay open and their salespeople get paid.
They’ll rarely pay you the estimated trade-in value you find online. This guarantees that the first trade-in value they offer you will be the lowest number. From there, you’ll need to negotiate and work your way up.
Dealers may “lose their keys” after a test drive
When you want to trade in your old one, the dealer may do some small scams. When you check out a vehicle in their parking lot, they usually take it for a test drive.
They will give you an unacceptably low offer, and you will be angry and try to walk away from the deal. Then, the salesperson will claim that they don’t know where your keys went.
Maybe they’ll say someone gave it to so-and-so, and then they went for a test drive again, so you need to wait another half hour. At the same time, they’ll try to keep in touch with you and do their best to close the sale. Some buyers get frustrated and eventually give in.
Avoid this strategy: What is the easy way to avoid this? Carry a second set of keys with you. Tell the dealer that they can mail you the “lost key” after the key is “found”.
The dealer can refuse to trade in
What should I pay attention to when trading in a car? There’s nothing to force a dealer to accept a trade-in or even make an offer for your car. If the vehicle is too expensive, too damaged, not ideal, or has a bad history, they can pass.
Conclusion
Understanding how car trade-in works is the first step into a new car. It’s a great way to save money on new purchases and potentially get a better deal. If you need more guide to buying a car, there are plenty of options on our blog. Make sure you have the right car tools and accessories to easily own and operate your vehicle.
