How Does Trading in a Car Work?

When a car owner is interested in buying a new vehicle, they might offer up their current car as a trade-in at the dealership. A trade-in can help decrease the cost of the new vehicle while also allowing the car owner to get rid of a vehicle they no longer want or need.

How does trading in a car work? The process is fairly easy, and car owners can trade-in a vehicle to apply to either the purchase of a new car or even when leasing a new model. When considering a vehicle as a trade-in buyers should:

• Research the value of their vehicle

• Clean up their vehicle

• Locate the title of their vehicle

• Understand the payoff amount of an outstanding loan

What is a Trade-In?

Using a car as a trade-in when purchasing a new vehicle means that the car owner is selling the vehicle to the dealership. The price of this sale is then used to offset the price of a new car purchase.

A trade-in also can be used when leasing a car, too. However, instead of decreasing the cost of the vehicle, using a trade-in for a lease can help decrease a monthly payment amount.

When buying a new vehicle, the trade in value is going to be less than the value that the owner would receive if they sold the vehicle privately. The dealership needs to make a profit from that trade-in. While a private buyer is interested in the vehicle for personal use, the dealership is interested in it for its resale value.

While using a car for a trade-in is often easier than selling the vehicle privately, car owners who want to get the best offer for their trade-in need to understand its value.

How to Find the Value of a Trade-In

Kelley Blue Book (KBB) is considered the gold standard for vehicle valuation. Car owners can use KBB to research the trade-in value of their vehicle; the site requires car owners to enter the make/model or VIN of the vehicle. Owners also will be asked to select the trim of the model as well as other specific features.

Be honest about the condition of the vehicle. Selecting a condition that isn’t accurate will skew the valuation estimate. The purpose of using KBB is to obtain the most accurate vehicle trade-in value. This is the price that car owners should know before visiting the dealership.

KBB will provide both an average estimate and a value range, too. Some dealerships could offer more than the average. Others might offer less.

Clean the Vehicle Inside and Out

Before offering a vehicle as a trade-in, car owners should clean their vehicle thoroughly. Take the vehicle to a car wash. Vacuum and clean the interior. If possible, car owners also might want to invest in a professional detailing service. While detailing the car could be a bit more of an investment, it will ensure the car looks great when it drives into the dealership.

For those who opt for a DIY cleaning, try to remove any stains from the upholstery. Don’t forget to clean the floor mats.

If the car has any mechanical issues, get them repaired before trading in the vehicle. If this isn’t financially feasible, disclose all issues to the dealership. Car owners need to understand that mechanical issues can decrease the value of the vehicle.

Locate the Title

Trading-in the vehicle at the dealership will require the car owner to sign over the title. Before visiting the dealership, locate the title. While a lost title can be replaced, this requires a visit to the DMV and it could be a process.

In addition, if the title still has a lien holder but the car has been paid in full, the owner needs to find the lien release paperwork (this is sent by the lender when the loan is paid in full).

Understand the Payoff Amount of an Outstanding Loan

If the lien on the title is still active, the car owner should contact the lender to understand the payoff amount for the outstanding loan. The car owner will need to compare the outstanding balance to the estimated trade-in value of the vehicle.

If the loan balance is higher than the trade-in value, the car owner will need to decide how they want to proceed. If they can feasibly pay off the loan, this might be the best option. However, if they don’t have the ability to pay off the outstanding amount, they could research the resale value of the vehicle (this is the price they could receive via a private sale).

The private sale value is typically higher than the trade-in value. Before selling a car privately, the car owner needs to talk to their lender to find out how to handle a private sale. Some lenders have stipulations on how a private sale should be handled.

In some cases, the private sale value still won’t be higher than the loan balance. While a car owner could elect to trade-in their car and roll the outstanding loan balance into a new loan, this would create a state of negative equity in the new vehicle.

Car buyers who have a trade-in that is deemed ‘underwater’ (the loan value is higher than the trade-in value) need to evaluate their options to determine what is ideal for their financial situation.

Negotiating a Trade-In

Car owners who have equity in their vehicle might determine that using it as a trade-in is the best option. However, the offer from the dealership might not be in line with the value that the car owner was expecting.

When trading-in a vehicle, the offers from dealerships could vary. This could be a point of negotiation for buyers. When a buyer knows the value of their vehicle, they are in a better position to negotiate. Talk to the dealership about the researched value and ask about why their offer is lower than the estimated trade-in value.

In some cases, dealerships might not budge. Car buyers could elect to visit other dealerships to determine if they could receive a better offer. In some cases, walking away might be the best option.

The Economics of Trade-Ins

When the car market is hot, and used cars are in high demand, the price of a trade-in could reflect this surge for used vehicles. When buyers use KBB as a resource for understanding their trade-in value, the market economics will be reflected in the KBB estimate.

During a time of increased demand, car owners could realize that their vehicle is worth more now than it was when they purchased it. The market for used cars can be hot and cold, and car owners who catch the market when it’s hot could reap the rewards.

Combining the price of a trade-in with a large down payment could position car buyers for lower interest rates and better loan terms, too. While not all buyers could qualify for the best terms or rates, a trade-in plus a down payment will help lower the price of a new vehicle and help decrease the amount of interest paid during the life of the loan.

For many buyers, a trade-in provides an easy way to sell an unnecessary vehicle while also offsetting the purchase price of a new vehicle. Before selling a car to a dealership, though, car owners should research the car’s value and clean up that older car to help ensure a smooth trade-in process and secure the best price possible for their vehicle.