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Buying a car can be costly, so many dealers allow you to trade in what you're currently driving to help knock down the price. While a trade-in isn't the best option if you want to maximize your profit, it can be worth it if you prefer convenience or don't have time to sell your car to a private party.
If you're considering trading in your car, here are some tips on how to get as much value out of it as possible.
How to Know When It's Time to Trade in Your Car
If you need a new vehicle right now, you may not have the luxury of timing your trade-in. But if you have some flexibility, there are some factors to think about. Consider the following:
There's no magic number of miles that'll impress a dealer assigning a value to your vehicle, as even a low-mileage car can be in rough shape physically and mechanically. There are, however, some mileage milestones that tend to factor into the calculation. A relatively new car, for instance, may start needing some major repairs around 30,000 or 40,000 miles. That's also around the same time many manufacturer's warranties end.
As your vehicle inches closer to 100,000 miles, it may become less appealing for dealers to include in their certified pre-owned category, which may drop the value even more. But a high-mileage car can still retain a lot of value if it's been taken care of and it's an in-demand model.
If you're waiting to trade-in a car, it may be wise to give it a break from use, for the sake of keeping mileage as low as possible and reducing the potential for further wear and tear.
Vehicle Age and Loan Repayment
Cars depreciate rather quickly in the first year, but more gradually as time goes on. So the newer the vehicle is, the more value you'll get out of it. For this reason, the car's model year can play a big role in its trade-in value. After a certain point (5 or so years), your vehicle's value will "bottom out," so to speak, so you likely won't see a significant difference if you wait longer than that.
Of course, you'll also need to consider how much equity you have in the car—the difference between what you can trade in the car for and how much you owe. If you bought the car new and didn't put much down or trade in a vehicle, you may be underwater on your loan, which means you owe more than it's worth. In this scenario, you'd end up needing to roll over the remaining amount you owe into your new loan or directly pay the lender the difference.
Time of Year
People tend to buy more cars during spring and summer, which means dealers are willing to pay more for trade-ins to meet the demand. If you try to trade in your vehicle during or shortly after the holiday season, the demand may not be as high as consumers are spending money on other things.
You may also consider that since the model year of your vehicle is a factor, it may work against you to wait until the next calendar change makes it feel even older. It may also matter that the latest model has just been released. New models tend to roll out in the fall, so think about trading in your car before then.
As with most other aspects of the car-buying process, trade-in values can be negotiable. This means that the less pressure you're feeling to buy a car, the more leverage you'll have. If a dealer doesn't offer a price that you like, you can check with other dealers in the area if they'll offer you more.
But if you're in a time crunch, taking the time to shop around and negotiate will be more challenging. You might even be swayed to take the first trade-in offer you get in the interest of time and convenience.
When Should You Wait to Trade In Your Car?
Trading in a vehicle can be key to helping you afford your next car. But in some cases, it may not be worth it.
You Have Prepayment Penalties
Some auto lenders charge a fee if you pay off your loan early. These penalties are not allowed on loans longer than 60 months, but many states allow them if your repayment term is shorter than that.
If you're still making payments on the car, check the terms of your loan contract to find out if your lender will assess a fee if you sell the car before your loan term is up.
You Recently Purchased the Car
The process of buying a car includes more than just the sales price of the vehicle. In most states, you'll also have to pay sales tax and you may opt for add-ons, such as a service or maintenance contract, gap protection and more.
If you recently purchased your current vehicle, trading it in for a new one means you'll pay many, if not all, of those costs again. If you find yourself frequently trading in cars you haven't owned for very long, you might instead consider leasing a car.
You Owe More Than It's Worth
If you bought your car new, rapid depreciation during the first year of ownership could increase your chances of being underwater on your loan, which isn't ideal. Because you owe more than the dealer is willing to pay, the trade-in won't reduce the cost of the new vehicle at all.
The result is you'll have a higher loan amount on the new car—which increases your chances of getting underwater on that loan too—or you'll need to pay the lender the difference.
Should I Sell or Trade In My Car?
The alternative to trading in your vehicle to a dealer is to sell it to a private party. Neither is inherently a better option for everyone, though, so it's important to understand both the pros and cons of each approach.
Selling to a Private Party
The primary advantage of selling your car instead of trading it in is that you'll usually get more money on the deal. Dealers offer lower values on trade-ins because their goal is to make a profit when they turn around and resell it. With a private-party purchase, on the other hand, the person buying the car often plans to keep it.
Use a car-valuation service such as Kelley Blue Book, to view values for your vehicle for both options.
The downside of selling your car to a private party is that it takes time and can be a hassle. You'll need to create the listing, field inquiries, set aside time to allow people to take the car for a test drive and more. If you need to replace your car sooner rather than later, selling it may not be the most practical option.
Trading In to a Dealer
Trading in your vehicle instead of selling it is a much quicker and more convenient process. You don't have to go through the process of advertising the sale or dealing with potential buyers. You simply bring your car to the dealership, and the staff there will do most of the work. If you're willing and have flexibility, you may be able to negotiate a higher value than the dealer originally offers.
The disadvantage of trading in your vehicle is that you'll make less money off the sale. This is especially important if your trade-in would still leave a balance on your existing auto loan. If you might be underwater on your loan or close to it, a private-party sale may be better.
Trading In Your Car and Down Payments
A vehicle trade-in may be all or some of the down payment you make on your vehicle purchase. Like a cash down payment, a trade-in can reduce the cost of your new car, which cuts down how much you need to borrow and your monthly payment.
If you want, you can provide a mix of trade-in value and cash as your down payment. How much cash you add will depend on how much you have on hand, but the more money you put down, the easier your new loan will be on your budget. Just be careful when tapping savings, and make certain you're not wiping out your emergency fund.
A higher down payment can also reduce your interest rate, saving you even more money. Just keep in mind that if you qualify for a very low interest rate, it may be better to use that money to invest for your future and get a better return.
What Types of Vehicles Hold Their Value the Best Upon Trade-In?
According to Kelley Blue Book, Subaru and Porsche cars have the best resale value in 2020. Here are some of the top options for different categories:
- Best subcompact SUV: Subaru Crosstrek
- Best compact SUV: Subaru Forester
- Best two-row midsize SUV: Subaru Outback
- Best full-size SUV: GMC Yukon
- Best compact luxury SUV: Porsche Macan
- Best compact car: Subaru Impreza
- Best midsize car: Subaru Legacy
- Best full-size car: Toyota Avalon
- Best luxury car: Lexus GS
- Best hybrid car: Toyota Prius Prime
- Best electric vehicle: Tesla Model X
- Best minivan: Honda Odyssey
- Best midsize pickup truck: Toyota Tacoma
- Best full-size pickup truck: Toyota Tundra
Make Sure Your Credit Is Ready for a Car Purchase
Trading in a vehicle or selling it to a private party can give you some cash to reduce how much you borrow on your new car. But it's still important to take steps to ensure that you qualify for a low interest rate on your loan.
To do this, check your credit to get an idea of where you stand. If you need to make some adjustments or improvements, you can find the information you need in your credit report. You can get a free copy of your credit report from all three credit bureaus by visiting AnnualCreditReport.com. You can also get your credit reports and score for free from Experian. Improving your creditworthiness may mean getting caught up on past-due payments, paying down credit card balances, disputing inaccurate information and more.
Improving your credit can take time, but it can also help save you hundreds or even thousands of dollars in interest on an auto loan.