How Does Trading In A Car Work? A Guide

If you're thinking about getting a new car and are unsure what to do with your old one, trading it in can make the process easier. It can be an easy way to use the value of your old car to purchase a new one. This guide explains how trading in a car works so that when you head to a dealership, you'll be ready to make an informed choice for your upgrade.

How Do Trade-Ins Work?

Trading in a car can be straightforward. You’ll typically bring your vehicle to a dealer who will tell you the value of your car based on factors such as its condition and the auto market. If you have a balance on an auto loan associated with the car you’re trading in, you’ll usually have to pay that balance off upon trade-in.

By trading in your car, you can offset some of the expense of buying a new or used car. The money from the trade-in can be applied directly towards purchasing the new vehicle, reducing the amount you need to finance or pay upfront. This can be helpful if you want to upgrade your car but have a limited budget.

How To Trade In A Car: 4 Steps

Trading in a car involves a few key steps to ensure a smooth and successful transaction.

1. Determine Your Car’s Trade-In Value

To trade in your car, it's important to determine its value. This can be done by using online services such as Kelley Blue Book or Edmunds, which provide estimated trade-in values based on factors like the make, model, year, mileage, and vehicle condition.

It's also essential to consider if there is an outstanding auto loan or lease on the vehicle. If you owe money on the loan, the trade-in value will be used to pay off the remaining balance. If the trade-in value exceeds the outstanding balance, you can apply the excess as a credit towards your new car purchase. Having a good idea of your car's value before you head to the dealership can help you negotiate with dealers and make well-informed decisions.

2. Compare Offers From Dealers

The next step in buying a new car is comparing offers from different dealerships. You can start by visiting multiple dealerships to discuss your trade-in and explore their offers. You can also utilize online resources to get quotes from various dealerships without physically visiting each one.

When comparing options, consider factors such as the trade-in value, the price of the new car you are interested in, any additional incentives or discounts the dealership offers, and the overall customer experience. It's important to evaluate your options carefully and consider which dealership provides the best overall value and meets your needs.

3. Gather The Necessary Paperwork

Next, gather the necessary documentation for the trade-in process. These documents verify ownership of the vehicle and provide important information about its history and condition. The dealership will require these documents to complete the paperwork for the trade-in process and transfer of ownership.

Examples of documents to have ready include:

• Vehicle registration
• Car title
• Vehicle maintenance records
• Loan or lease documentation (if applicable)
• Identification (driver's license, passport, etc.)

Organizing these documents will help streamline the trade-in process and ensure a smooth transaction with the dealership.

4. Get Your Car Ready For Trade-In

To improve your vehicle's trade-in value, consider addressing minor issues such as dents, scratches, or mechanical problems, especially if you can do so without spending much. Fixing these issues can increase your car's value and make it more appealing to potential buyers.

Also, a thorough cleaning both inside and out is helpful, as is removing personal items. Investing some time and effort into these steps can potentially increase your car's trade-in value and make it more attractive to dealerships.

Benefits And Drawbacks Of Trading In A Car

When Should You Trade In A Car?

Several circumstances might lead you to a vehicle trade-in:

• High mileage: If your current car has high mileage and you anticipate potential maintenance issues or decreased reliability, it could be a good time for a new one.
• Growing family: As your family gets bigger, you may need a larger vehicle to accommodate everyone comfortably.
• Desire for something new: Sometimes, a trade-in can be motivated by a passion for a new vehicle with updated features, a better sound system, or a sleeker design.
• Greater fuel economy: An electric vehicle or a hybrid might be a good option if you want to reduce your carbon footprint and save on fuel costs.
• Safer vehicle: If your current car lacks advanced safety features or doesn't provide adequate protection, it's smart to trade it in for a vehicle with the latest safety features.

Trading In A Car With Positive Equity

Your car has positive equity if its value is greater than your loan balance. If your vehicle is worth $9,000 and you owe $6,000 on your car loan, it has a positive equity of $3,000.

Determining if your vehicle has positive equity involves comparing its current market value to the amount you owe on your car loan. To calculate your equity, start by finding out its current market value by using online valuation tools or getting appraisal offers from dealerships.

Next, contact your lender to obtain the payoff amount on your car loan. This amount includes the remaining balance plus any early repayment fees or penalties. Finally, subtract the loan payoff amount from the market value of your car to determine whether you have positive equity.

Having positive equity in your vehicle for a trade-in strengthens your negotiating position with the dealership. It can also reduce your monthly car payments or shorten the loan term.

Trading In A Car With Negative Equity

Similar to determining if your car has positive equity, you can assess the vehicle’s current market value against the outstanding balance on your auto loan. If the value of your vehicle is less than what you owe on the loan, you have negative equity.

Attempting to trade in a vehicle with negative equity can hurt you financially. The dealership will typically roll the remaining loan balance into the new loan for your next vehicle. This means you'll owe more on your new car than it's worth from the start. Unfortunately, this can result in higher monthly payments or longer loan terms.

There are a few ways to reduce negative equity in your vehicle. You can refinance your auto loan for a lower interest rate, which may help lower your monthly payments. Another option is to make larger monthly payments towards the principal, helping you pay down the loan faster. Also, consider keeping your current vehicle longer to gain more equity.

The Bottom Line

Trading in a car is a convenient way to apply its value to a new car. However, it may not be the best choice if you're looking to maximize the value of your current vehicle or if you have negative equity in your existing car. Carefully evaluate your situation and consider alternatives like private sales or waiting to buy a new car to determine if a trade in is your best option.

Download the Rocket Money℠ app to track your spending and see how much of a car payment you can fit into your budget if you decide to trade in your vehicle.