When the time comes to move on from your beloved car and buy a new set of wheels, the process can be difficult, to say the least. Over the years, a great car can become more than just an appliance. Even someone driving a simple, affordable, and reliable Toyota Corolla risks developing an emotional bond with their car. Luckily, you have a number of options for selling a used car and buying the next car.
You can sell it privately, sell it 100% online, or take it to a car dealership and offer it as a trade-in while you purchase your next four-wheeled friend. Selling your car 100% online is quick and easy, but trading in a car works to reduce headaches, while also providing a sales tax benefit in many states. If you're taking out an auto loan, your trade-in can even serve as your down payment (or some of it, depending on your credit score and the new loan terms you're able to secure). But trading your current car in also strips you of most of your control over the transaction. How do car dealers determine the value of the car you're trading in? And, just as importantly, what’s going to happen to your car after you hand over the keys?
The Truth About Trade-Ins
- How Much is My Car’s Trade-in Value?
- The Sales Tax Benefit
- Trading in a Financed Car
- Selling a Car 100% Online
- The Bottom Line
How Much is My Car’s Trade-in Value?
First things first: You're probably wondering, "How much is a dealer going to give me for my trade-in vehicle?"
Depending on your current vehicle, a dealership might offer you a decent chunk of change. There are a lot of factors that go into a dealership’s trade-in valuation, from age and mileage to the car’s condition and the desirability of its specific make, model, and options. CarGurus offers a trade-in value estimate, but across the board, no dealership is going to offer you as much money for your car as you could earn on a private sale.
And there’s good reason for this. Dealers acquire cars from a variety of sources, with trade-ins and auctions being the two most prominent. To put it simply, dealerships never have any incentive to pay you more for your trade-in than they would pay to acquire the same make and model from an auction. This immediately caps the potential value of your car and, considering the auction price must be lower than the car’s retail price (the dealer has to make money, after all), the chances of your trade-in value exceeding its market value are effectively zero.
Particularly if it’s trying to hit a monthly sales goal, a dealership might boost the value of your trade-in a bit to secure a sale, but they’ll almost certainly make up the difference when pricing your new vehicle. Think of it as a car-buying balancing act: You can negotiate a lower price on a new car, or you can negotiate a higher valuation on your old car, but you shouldn’t expect to do both.
The Sales Tax Benefit
This isn’t to say trading in your car is a bad idea. There are plenty of benefits to trading, including simplicity, but the potential tax advantage is a major one that often gets overlooked. If you live in a state that charges sales tax, the next two paragraphs are critically important (you may be excused, citizens of Delaware, Montana, New Hampshire, and parts of Alaska).
Let’s imagine that you’re hoping to buy a brand new Subaru Outback in your home state of Vermont. Great choice. Thanks to a couple of options packages, the price of the new car you want is $35,585, but you’re a skilled negotiator and managed to get the dealer to offer if for a sale price of $34,000. The Green Mountain State charges 6% sales tax, meaning you’ll have to pay $2,040 in tax on your purchase, bringing the total out-of-pocket to $36,040—so much for a discount!
But you also have a trade-in! The dealer has looked over your old Subaru Crosstrek and, even though it’s painted bright tangerine orange pearl, they’re willing to offer you an even $16,000. If you agree to trade your Crosstrek, the dealership will subtract $16,000 from the purchase price of your Outback, bringing the cost before tax to $18,000. 6% of 18 grand is $1,080, meaning not only did you negotiate more than $1,500 off the MSRP, but you saved nearly $1,000 more in taxes. That’s the beauty of how trade-ins work in states with sales tax. Plus, if you're financing this car purchase, that difference will not only impact the payoff amount but also continue to benefit you over the life of your new car loan: even if the lower total amount on the new auto loan amount translates to only slightly lower monthly payments, when you factor in the interest rate your lender has offered, you stand to save significant cash.
Trading in a Financed Car
If you’re planning to trade in a car that you’ve financed, the status of the loan balance will play a role in how much cash you receive for the vehicle. For instance, if a dealership offers you $10,000 for your used vehicle but you have a $5,000 remaining balance on the loan, you’re in a positive equity situation, where the value of your vehicle is greater than the loan balance. In this case, the dealer will generally buy out your loan when taking the car’s title from you, netting you $5,000 of the $10,000 offer.
However, if you own a car worth less than the value of its auto loan, then you’re in a negative equity situation. For example, if the dealership offers you $10,000 for your used vehicle but you owe $12,000, you would owe the dealership an extra $2,000 after trading in your car, so they could pay off the old loan on your behalf. Negative equity (also known as being upside down on a loan) often occurs when an auto loan includes a large interest rate, a long term (think 84 or 96 months), or both. In these situations, sellers are generally best suited searching for the best price possible, whether that comes from a private party or a dealership.
Selling a Car 100% Online
When you trade in your car, the dealership has a couple of choices. It can either pay to re-condition your car and put it up for sale on its own lot, or it can put it up for auction, where it will be bought by another dealership. Dealers can maximize their profit by selling a car themselves, but only if they’re confident the car will sell quickly. Less desirable cars are more often destined for the auction block.
You can now sell your car 100% online with CarGurus, as well as some other companies like Kelley Blue Book, Edmunds, and CarMax. Essentially, these companies leverage algorithms to estimate a vehicle’s worth, which they can offer you thanks to their network of dealerships in the market for used cars.
CarGurus is able to do this thanks to an expansive trough of data that helps predict the current market value of a car. So, you sell your car for a pre-determined amount to a dealer in the CarGurus system that can then either opt to keep the car to sell on its own lot, or it sells it to an auction house, which puts it on the auction block with the hope of reaping a profit.
With all of these instant cash offers, the result is a clean, streamlined process for you.
In addition to getting an instant offer, you can use CarGurus to sell your car online to a local dealership. Think of this as the trade-in process taken online, and without the need to buy a new car as part of the process. Just add details about your car to help CarGurus gather multiple offers, drop the car off at the dealership you’ve chosen, and then you can either accept your payment as a trade-in price, or take it in cash. This allows you the convenience of online selling from the comfort of your couch, but without giving up valuable in-person elements like test drives if you choose to buy another car.
The Bottom Line
As with most aspects of the car-shopping process, it’s best to shop around a bit when looking for a trade-in valuation. Run the numbers on sites like CarGurus, check out valuations from various companies, call some dealerships, and see who’s willing to give you the best deal. Keep in mind that the trade-in is only one of the five levers of a used car-deal (or six, if you’re shopping new), and a disciplined dealer won’t usually boost a trade-in value just to move a car. So, if a trade-in offer seems too good to be true, pay close attention to the other elements of the deal.
