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When buying a new or used car, trading in your old one is an excellent way to reduce the total cost and save you money on the monthly payments. In fact, 45% of all car purchases in 2019 relied on trade-ins for part of the financial equation, according to Edmunds.
The process of trading in a car includes preparation on your part, an appraisal by the dealer, negotiations and a final offer. If you're thinking about trading in your current vehicle for a new one, here's what you need to know.
Factors That Impact Your Trade-In
When you bring a car to a dealership to trade in, there are several different things they look for to determine its trade-in value. That can include:
- Supply and demand in the local market
- Time of year
It's also important to note that different dealers will have their own formulas for calculating trade-in prices. So if you're planning to shop around for your next car, it's a good idea to do the same with your trade-in value.
Can I Trade in My Car for a Lease?
If you're thinking of leasing a new vehicle instead of buying one, you can trade in your current vehicle as a down payment.
Of course, the leasing process is different from the buying process. When you lease a vehicle, you typically have a contract for two to three years. During that time, your monthly payment goes toward covering the vehicle's depreciation, plus interest.
As a result, leasing is typically cheaper than buying, at least in terms of a monthly payment. In the long run, however, building equity in a vehicle and selling it when you want a new one can be more financially beneficial.
So is leasing a car a good idea? It really depends on your budget, preferences and goals. Leasing usually allows you to get into a new vehicle for less than what you'd pay if you took out an auto loan, and cycling through a new lease every two to three years ensures that you're always driving a newer car. That can save you money on costly maintenance and repairs that become more frequent as vehicles get older.
On the other hand, lease agreements often come with strict limitations and restrictions, including how many miles you can drive every year and the inability to make changes to the vehicle, such as upgrading to a better sound system. And, at the end of the lease, you won't own the car. Once you've paid off the loan on your purchased car, however, you'll own the car outright and can use it as a trade-in or potentially drive it for years without having to make a car payment every month.
Take your time to weigh leasing versus buying to determine the right fit for you.
How to Get the Best Price for Your Trade-In
It's important to note that trading in your vehicle isn't the best way to maximize your profit if you're ready to sell your car. Dealers pay lower prices on trade-ins because they're turning around and selling the vehicles for a profit. In contrast, if you sell the car in a private-party transaction, you can usually get more money because the buyer isn't in the business of buying and selling cars and is typically buying it for their personal use.
That said, if you prefer the convenience of a trade-in, here are some steps you can take to negotiate the best price from the dealer.
Research the Car's Value
In many instances, dealers have an unfair advantage over car buyers. Not only do they have all the information they need to negotiate at their fingertips, but they also bring experience to the table.
So it's crucial that you gather as much information as you can to level the playing field. The most important way to do this is to research your vehicle's value. You can find pricing through websites like Kelley Blue Book and NADA Guides based on the unique aspects of your vehicle. You'll also be able to see what you could get if you were to sell the car privately instead.
You may also reach out to some online car retailers to get a quote. Carvana, Shift and Vroom can give you offers that you can use to further nail down what you want to get from the dealer.
Clean Up the Vehicle
At the very least, it's a good idea to have the car detailed so it's ready for the dealer to sell it quickly. If the vehicle has some minor cosmetic defects, such as a small crack on the windshield, a scratch in the paint or a small dent, look for ways you can fix them affordably.
Depending on the cost of the fix, you may not get enough extra cash in return to make it worth it. Still, researching your options can help you make a better decision.
Negotiate the Trade-In Separately
When you buy a car, dealers typically try to do some financial maneuvering to get the best deal they can. One of the more common strategies is to try to get you to focus on the monthly payment instead of the sales price.
Dealers often use a longer repayment period to reduce the monthly payment and make it seem like a better deal. By getting you to focus on that single figure, they can divert your attention away from the price of the trade-in. But in the end, you'll pay more money in interest with a longer repayment period.
As such, it's a good idea to negotiate the price of the trade-in separately from the sale of the new vehicle. With the information you've gathered in your research, you'll be in a better place to negotiate a better deal this way.
Once you agree on a price, get it in writing and take that to the dealer's finance department or even another dealer if you want to shop around.
What Is Negative Equity?
Trading in a car is a convenient way to save money on your next vehicle, but in some cases, it may not be worth it.
Negative equity is a term used to describe a situation where you owe more on your current auto loan than the car's value. According to Edmunds, 44% of new car sales with a trade-in involved negative equity in April 2020.
So what happens if you have negative equity? In most cases, the dealer will offer to pay the full balance of what you owe and add the deficiency to your new auto loan. This is the most convenient option, but it means you'll have a higher monthly payment on your new auto loan than if you had positive equity.
Selling your car to a private party could be a good way to avoid this, especially if the difference in sales price is enough to wipe out the negative equity. But if it's not, you'll need to pay the deficiency in a lump sum, which may not be possible if you don't have the required cash.
As with every other part of the trade-in process, it's crucial that you consider all of your options if you have negative equity because there's no right answer for everyone.
Your Credit Score Is Another Good Way to Reduce Your Payment
Trading in your car can decrease your monthly payment on a new auto loan significantly. But depending on the value of the vehicle, having good credit may be even better. Your credit score is an important factor in a lender's decision to approve your application and determine your interest rate.
If you have excellent credit, you'll typically get approved for a loan with single-digit interest rates. But if your credit is poor, you could end up with a much higher rate, which can be upwards of 20%.
Check your credit score before you start the car-buying process to determine where you stand. If your credit needs work and you're not in a rush to get a new car, take some time to address areas of your credit file that are hurting your score.
That can include getting caught up on past-due payments, paying down credit card balances and disputing any inaccuracies on your credit reports. Also, take steps to develop good credit habits, such as keeping your credit card balances low and avoiding unnecessary credit applications.
This process of improving your credit can take time, but your efforts could end up saving you hundreds or even thousands of dollars in interest.