When the time comes to buy a new car, you may consider trading in your car at the dealership. For many people, it offers the most convenient method for selling their old car and buying a new one. Your old car’s trade-in value can easily be used to offset the amount you need to borrow to buy the new one.
But is a dealership trade really your best option? At Addition Financial, we work with our members every day as they buy cars. One of the questions we hear the most is:
As you might expect, there are pros and cons of trading your car in at the dealership. Let’s review them, so you can make an informed decision when the time comes to sell your car.
The Pros of Trading Your Car in at the Dealership
Car dealerships offer a convenient and easy way to sell your old car via a trade-in. With a trade-in, you’ll get a fair price for your car, usually based on the Kelley Blue Book value.
Here are some of the reasons you may want to consider trading in your car at the dealership.
Convenience
The first big benefit of trading in your car at a dealer is convenience. When you sell a car on your own, you are responsible for every aspect of the transaction. You’ll need to:
- Estimate the value of your car and set a price for it
- Find a place to list your car for sale and create an ad
- Screen buyers
- Meet with buyers and arrange for test drives
- Negotiate a price
- Handle the paperwork and other aspects of the sale
When you trade your car in at a dealership, the dealership will handle those things for you. If you value your time and would prefer not to spend it negotiating a sale, then a trade-in may be your best option.
Maintenance
If you plan to sell your car privately, you’ll need to make any necessary repairs and detail the car to fetch a high price. That’s not the case if you trade it in.
When a dealership takes possession of your car, they also accept the responsibility for any necessary repairs. That means you won’t need to pay to detail your car. However, you should be aware that significant repairs may impact your car’s trade-in value.
Loan Reduction
The next benefit to be aware of is that you can use the trade-in value of your car as a down payment on a new vehicle. If you get a good price for your old car, then you may be able to qualify for a low interest rate based on the down payment.
Even if the trade-in doesn’t impact your interest rate, it can still be used to offset the amount you need to borrow to get a new car. That means you’ll have lower car payments and less debt.
Lower Taxes
One of the benefits of doing a dealership trade-in is often overlooked: you can save money on sales tax.
Why? Because in most states, including Florida, you’ll pay sales tax only on the difference between the value of the car you’re buying and the trade-in value of your old car.
Let’s look at a simple example. In Florida, the sales tax is 6%. If you’re buying a car that’s worth $20,000 and you get $6,000 for your old car, that reduces the taxable price to only $14,000. Instead of paying $1,200 in taxes, you’ll pay only $840 for a savings of $360.
You should be aware that you will still pay sales tax on manufacturer’s rebates, but if the dealership offers a discount or incentive, you won’t need to pay taxes on that amount, either.
The Cons of Trading Your Car in at a Dealership
While the pros are substantial, there are some significant potential downsides to trading your car in at the dealership. Here are the things you should know.
Lower Price
Trading in your car at a dealership is certainly more convenient than navigating a private sale, but it comes at a cost. In many cases, you may be able to get a higher price from a private buyer than you will from a dealer.
It is in the dealer’s best interest to give you the lowest possible amount for your old car because it increases their profits. You’re not going to get the retail price because they need to be able to make money. In most cases, you can expect to get the vehicle’s wholesale value.
Tough Negotiations
Whether you sell your car privately or trade it in at a dealership, you’ll need to negotiate a price for your car. The difference is that negotiating with a dealer means negotiating with someone who makes deals for a living.
The bottom line is that you’re likely to get a significantly lower price for your car at a dealership than you would if you found a private buyer.
Limited Buying Options
One of the most powerful tools you have in your arsenal when you walk into a dealership is your ability to walk away if you don’t get the deal you want
Trading in your car limits your options because the dealership isn’t paying cash. Once you have negotiated a trade-in, you must buy your new car from the dealership that bought the old one.
In other words, the act of trading in your car significantly limits your buying and negotiating options because you lose the option of leaving.
Tips for Trading in Your Car at the Dealership
Now that you understand the pros and cons of trading in your car at a dealership, let’s talk about some of the things you can do to get the best deal possible on your trade-in if that’s the route you take.
First, you should always negotiate the price of your new car first. In fact, don’t even mention the trade-in until after you have agreed to a price for the car you’re buying. The dealer is always going to want to maximize their profits, which is understandable but not advantageous to you. By waiting, you can negotiate the best possible price for the new car and then go into the negotiation for the trade-in knowing that you have secured a good deal.
It’s also worth noting that negotiating the price of your new car first leaves the option of walking away open to you. Your willingness to leave is a huge advantage in any negotiation.
Second, make sure you know the approximate value of the car you want to trade in before you set foot in a dealership. That means crunching some numbers. We suggest starting with Kelley Blue Book and Edmunds to get a rough idea of what your car is worth. You should adjust your expectations based on your car’s maintenance history and condition.
In addition to checking the basic value of your car, you should also do some research. If you have a top-selling, popular model, you can reasonably expect to get more money than you would if you had a less popular model.
Third, even though major repairs will be the responsibility of the dealership, it’s still a good idea to clean out and wash your car before you drive it onto the lot. Think of it as giving your car “curb appeal” to make it attractive to the dealership. You should also bring your car’s maintenance records to show that you have taken good care of it.
Fourth, be wary of a salesperson trying to lowball you on the value of your trade-in. Sometimes, a dealer will tell a customer that the value of their trade-in doesn’t match their expectations because they used a different guide. If that happens, ask them which guide they used and then look it up on your phone.
Fifth, keep your loan balance in mind. If you’re upside down on the car you want to trade in – meaning that you owe more than you can reasonably expect to get for it – you’ll need to build that amount into your loan. You may be in a stronger position if you’re pre-approved for a car loan, since you’ll usually end up paying less interest than you would if you got a dealer loan.
Finally, be on the lookout for unscrupulous dealer tactics. Some things to consider:
- Bring a copy of your license instead of handing the originals to a dealer.
- Don’t surrender your car keys until you have negotiated a price for both your new car and the trade-in.
- Don’t surrender your car’s registration until you have negotiated everything and you’re in the finance office of the dealership.
One final note that applies at every stage of the transaction. You should always listen to your gut instinct. If you walk into a dealership and get a bad feeling, walk out. Those instincts are your brain’s way of protecting you.
The decision of whether to trade in your car at the dealership is yours to make. The pros, cons and tips we’ve listed here will help you make the best financial decision for you and your family.
Are you considering buying a new car? Click here to learn about Addition Financial’s auto loan options!
Posted on Aug 19, 2020
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