How to Trade In a Car

How Does Trading In a Car Work?

A car trade-in is when you swap your old vehicle in for credit toward a new one at a dealership. It's a fairly straightforward process to sell your car and buy a new one, but be aware that the dealership may not pay you as much for your trade-in as you can get selling your car on your own.

How Do Car Dealerships Determine Trade-In Value?

Many factors can determine your car's trade-in value, including:

• Mileage
• Age
• Supply and demand in the local market
• Time of year
• Equipment
• Condition

It's also important to remember 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. Remember, the trade-in value of your car is negotiable; if a dealer is stuck on a low price, you can always take your car to another dealership.

Trading In a Car With a Remaining Loan Balance

Another factor to consider when trading in a car you're still paying off is whether the remaining balance on your auto loan is higher or lower than the value of your vehicle. The terms used here are "negative equity" and "positive equity." If you have negative equity in the car, also called being underwater, you owe more than the vehicle is worth. With positive equity, the reverse is true.

Here's how positive and negative equity factor in to your trade-in decision:

• Positive equity: When you have positive equity, you can apply the difference between your vehicle's value and what you owe toward the new purchase and lower your overall cost. For example, if your car is worth $20,000 and you owe $12,000 on it, you have $8,000 in positive equity you can use to bring down the cost of your new vehicle.
• Negative equity: Conversely, if you owe $20,000 but your car is worth $12,000, the dealer would typically pay the full balance of what you owe and add the $8,000 difference to your new car loan. According to the Edmunds 2023 Q4 Used Vehicle Report, roughly 20% of trade-ins on new cars have negative equity.

If you have negative equity, you may prefer selling your car to a private party. This could be a good option if the difference in sales price is enough to wipe out the negative equity.

Learn more >> How to Deal With an Upside Down Car Loan

How to Trade In a Car

Follow these steps to maximize your trade-in value and secure a great deal:

1. Research Your Car's Value

Dealers have a definite advantage over car buyers. Not only do dealers 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 gain leverage is to research the value of your car. You can find pricing through websites like Kelley Blue Book, J.D. Power and TrueCar based on the unique aspects of your vehicle.

Sites like these are often linked to car dealerships in your area who can send you an offer based on the information you submit. It's also a good idea to get a quote from any dealership you plan on visiting to purchase your next car.

You might also get quotes from online retailers like CarMax and Carvana to negotiate a better trade-in offer from the dealer.

2. Prepare Your Car

A clean and well-maintained vehicle will likely receive a higher price than one that is not. Before heading to a dealership, take some time to clean and detail your car so the dealer can sell it quickly.

Similarly, it may make sense to make minor repairs beforehand, such as fixing small dents, paint scratches or windshield cracks. Paying for major repairs may not be worth it in some cases, however, especially if the repair costs more than what you'll get back in trade-in value. Keep in mind, the dealership can perform major work for less money than you'd spend at a repair shop.

3. Make an Appointment at the Dealership

While you can trade in your car on a walk-in basis, making an appointment could help save time. Ask if you can be with the appraiser to see how they calculate your car's value. Having a better understanding of their valuation process in a transparent way may help you negotiate better.

4. 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 loan repayment period.

Don't fall into this trap. Negotiate the price of the trade-in separately from the sale of the new vehicle. Use the information you've gathered in your research to help you negotiate a better deal on the trade-in.

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.

Pros of Trading In Your Car

You May Save Time

You can trade in your old car at the dealership while purchasing a new one and arrange financing for the new one. Handling everything in one place is faster and simpler than visiting multiple locations for each task.

The Dealer Pays Off Your Loan

If you still owe money on your auto loan, the dealer can pay off the remaining balance and use any positive equity as a down payment toward your purchase. As previously mentioned, the dealer can also pay off your loan even if it is underwater, though selling your car privately for more money may be a better option.

You May Save on Sales Tax

Most states provide a sales tax break on trade-ins by allowing you to deduct your car's trade-in value from the new car's purchase price.

Say you purchase a brand-new vehicle for $35,000, and the dealer gives you $15,000 for your trade-in, bringing your total cost to $20,000. In this case, you'd pay sales tax on $20,000, not the $35,000 cost of the new vehicle.

Check your state comptroller's website to learn more about sales tax deductions and limits in your state.

Cons of Trading In Your Car

You'll Get Less for Your Car

Dealers want to turn around and sell your car for a profit, so you'll likely receive a lower trade-in offer than if you sold your car privately. Bear in mind, many dealerships are paying a premium for late-model cars and specific models. Research private-party sales prices for your car and compare them to your estimated trade-in value to help choose the best path forward.

It Can Complicate Negotiations

Ideally, you can focus negotiations on the price of the car you want to purchase, your car's trade-in value and the terms of your new auto loan or lease. However, the dealership's sales team wants to bundle those aspects into one central negotiating point—the car's monthly payment—which can complicate the process.

Learn more >> When Should You Trade In Your Car?

What Do You Need to Trade In Your Car?

Trading in your car is a relatively straightforward process, but you'll need some documents to negotiate a better deal and complete the transaction, including:

• Your driver's license
• Your car's title and registration
• Proof of insurance
• Trade-in offers and estimates
• Maintenance records
• Keys and remotes
• Ownership manual

If you have a loan on your car, be prepared to show your account number and loan payoff amount.

Can You Trade In a Car Without the Title?

If you own your car outright, you'll need the car's title and registration to transfer ownership. If you still have a loan on the car, the dealership can contact your lender, obtain the title and file all the necessary documents with the DMV.

Does Trading In a Car Impact Your Credit?

Trading in a car itself doesn't impact your credit, but the credit check and new loan might affect your score.

• New credit: When you apply for a new auto loan, your lender performs a credit check, or hard inquiry, on your credit. Hard inquiries stay on your credit report for up to two years and can temporarily lower your credit score by a few points.
• Average age of accounts: Paying off and closing your current car loan and taking out a new loan could shorten the length of your credit history. Generally, the longer your credit history, the better. This factor accounts for 15% of your FICO^® Score^☉ , the credit score used by 90% of top lenders.

Good Credit Can Reduce Your Payment

Trading in your car is a good way to lower your purchase price and, by extension, your loan payments. Similarly, maintaining a good credit score can save you substantial money over the life of your loan. That's because your credit score is a crucial factor lenders consider when approving your loan and calculating your interest rate.

Before you head to the dealership, check your credit report and credit score for free with Experian to see where your credit stands. If your credit needs work, consider taking some time to address any issues that could be dragging down your score. By improving your credit, you might secure a more favorable interest rate and save hundreds or even thousands of dollars in interest.