How Does A Vehicle Trade In Work?

Written by Susan Lahey
Published February 6, 2019
How vehicle trade-ins work at the dealership How vehicle trade-ins work at the dealership

You want a new car. Also, you want to get money for your current car. The easiest way to do that is in one transaction—an automobile trade in at a dealership. But how do you do it? What do you need to prepare? How much should you expect to get and what about your old loan? In short, how does a vehicle trade in work?

Automobile dealerships that sell new cars also sell old cars. In fact, they make a better profit from cleaning up, refurbishing, and selling used cars than they do from selling new cars. So, they’re always happy to offer you a shiny new car in exchange for money and your old car. They are going to do everything in their power to sell you the new car for the highest amount they can and pay the least amount for your old car. You are working to pay the least for the new car and get the most for your old car. You really need to be prepared and armed to advocate for yourself.

Research Your Automobile

When you find a car that you want, one of the questions the dealer will ask you is whether you have an automobile to trade in. Experts warn that you should not have that conversation while negotiating for the new car. First get the deal you want for the new car by researching the car’s value on sites like National Auto Dealers and Edmunds. These will tell you the automobiles’ book value—a beginning price from which to begin to negotiate. The actual price may differ depending on condition, extras, and what market is like in your area.

Then, once that agreement is made, discuss your old car separately. Use those same sources to research your automobile to figure out how much is reasonable for you to expect to get for your trade in before having the conversation with the dealer. Be honest about past damage and other issues.

Whatever amount the dealer agrees to pay for your old car, they don’t pay it to you in the form of cash; they deduct it from the price of the new car. That’s why it’s important to make separate negotiations—that keeps the transaction clean and avoids any financial sleight-of-hand that might cost you money.

For example, some common tactics are to slide the numbers up and down on the trade and the new car in the interest of “making the best deal for you,” but it actually benefits the dealership. It may be confusing when you are negotiating if you hear, “Well your car is worth $5,000, and this new car is worth $30,000 but how about I come down three thousand on the new car and give you $2,000 for your car?” At that moment, when you’re making a very big purchase, and you are feeling a lot of pressure, that math might sound right. However, it could be that:

  • The $30,000 car sells for $27,000 elsewhere, and you could have negotiated down to that price in the first place.
  • Your trade is worth $5,000, and that’s the least you should take for it.
  • You should be driving away in a new car with a $22,000 loan

Paying off the loan on your current car

If you owe nothing on your car, it should be a fairly straightforward transaction. They agree to take a certain amount off the price of your new car in exchange for you signing your current car’s title over to the dealership.

If you still owe on your car, the dealer will pay off your loan and may still take some money off the price of the car. Say you owe $5,000, but the automobile book value is $6,000. The dealer may pay off your old loan and also take $1,000 off the price of your new car. You will need to bring in a printout of your loan payoff amount, and the loan number, so that the dealership can do the transaction.

Transactions like this are very common, and you don’t even need to notify your current lender that you’re trading the car in. The dealer can generally be trusted to follow through on paying off the loan because until they do, they can’t have title to the car.

If you owe more than the car is worth, you can still usually get a dealer to bite, but pay attention to the details. If your current loan balance is more than the book value of the car—often referred to as being upside down or underwater on your loan—dealerships may offer to pay the additional amount for you. They’ll assure you needn’t worry any more about that old loan. What they generally mean, according to the Federal Trade Commission, is that you will no longer be paying the old lender. The dealer will add the debt over the book value to your current purchase.

If you owe $8,000, but the car’s value is only $5,000, dealers will tell you they’ll pay off that $3,000. What they mean is that they will add that $3,000 to the negotiated price of the new car or will subtract it from your down payment. So, if you negotiated a price of $25,000 for the new car, the loan will now be for $28,000, and once again you owe more than the car is actually worth.

You need to ask very clearly what they mean when they say they will pay off the amount and how it will be handled. Moreover, get it in writing. You may decide to do the deal anyway, but since you are now underwater (owe more than your new car is worth) on your loan again, you should strategize how to pay this off as quickly as possible to get into a better equity position.

When you trade your car in, you need to bring in all extra keys or remotes, the proof of insurance and registration papers and make sure you take any personal items out of the car.

Headed to the Dealership?

While many dealers do work on behalf of the customer, many others are not as straightforward and have many tactics for parting people from their money. If you’re interested in buying a car and trading your old one in, you might to best to begin by already having a loan in place with someone you trust who can help walk you through the process. If so, contact us!