If you’re looking to replace your current car with a new vehicle, a trade-in is a great way to make that happen.
You can turn your old car over to a dealer and use its value to lower the price of a new car that you’ve been eyeing.
Learning what’s involved in trading in a car will help you get the best deal possible.
How to Trade in a Car
Follow these steps to make a successful trade-in that’ll have you happily driving away in a new set of wheels.
1. Research Your Car’s Trade-in Value
You should understand how much your car is worth in terms of its trade-in value before you step foot on a car dealer’s lot.
You can research the value of your car using resources like Kelley Blue Book, Edmunds and the National Automobile Dealers Association (NADA), but make sure you’re paying attention to the trade-in price.
Your car’s trade-in value will be different from the retail price of a vehicle of the same make and model — or the amount you’d get if you opted for a private sale.
More specifically, the trade-in price is typically less than what you’d make if you sold the car on your own or what price a dealership would advertise for a similar car. That’s because the dealership has to make a profit on the trade in. Otherwise, it wouldn’t be a good business deal for them.
When you trade in your old car to buy a new vehicle, you’re basically paying for the convenience of not having to deal with the hassle of selling your used car independently.
As you’re researching your car’s trade-in value, make sure you’re factoring in more than just the make, model, year and mileage. The condition of your car, any tech upgrades and even its color can affect the value of the trade-in.
2. Know What You Owe on Your Existing Car Loan
You can still trade in a vehicle that you have a car note on, but you’ll want to be aware of how much you owe and how it compares to the car’s trade-in value.
If you have positive equity in your car — meaning you owe less than what it’s worth — that’s good news. The dealership can pay off your old auto loan and any remaining amount from the trade-in will be applied toward the cost of your new car.
For example, if your car’s trade-in value is $10,000 and your loan balance is $6,000, you’d have a $4,000 discount off the price of your new car.
If you have negative equity in your car — meaning you owe more than it’s worth — you can still trade in your vehicle. You’ll just have to pay out of pocket whatever the trade in does not cover to close out the old car loan or you can absorb that amount into your new car loan.
For example, if your car’s trade-in value is $10,000 but you still owe $12,000 on your auto loan, you’ll have to come up with the additional $2,000 to pay off your loan or fold that $2,000 into your new car loan.
Of course, the best situation is if you own your current car outright with no auto loan. Then the entirety of your car’s trade-in price would be applied to lower the cost of your new car.
3. Gather All the Documents You’ll Need
When you trade in your old car you’ll need to have the following documents:
Vehicle title, if you own the car outright
Car loan information, if you’re still financing the vehicle
Maintenance records to verify the car’s upkeep
Having this information all together will make the process easier when you go to get trade-in quotes.
4. Make Sure Your Car Is in Good Condition
When you’re trading in a car, you’ll get top dollar for your vehicle if it’s in the best condition. Make sure to clean your car thoroughly — inside and out — and take care of any minor work that could increase the value.
If your car needs a major repair or has pre-existing damage, that doesn’t mean dealerships won’t accept it as a trade-in. It’ll just be assessed at a lower value. It may not make sense to pay for an expensive repair or body work prior to trading in a car.
5. Get Multiple Quotes for Trade-in Offers
Getting trade-in quotes from multiple car dealers will help you find the best deal.
The dealership may need to inspect your vehicle in-person to give you a quote, while some companies, like CarMax and Carvana, have an online process for providing quotes. Either way, make sure you get the offers in writing.
As you compare quotes, you could get dealers to increase their offers to match or beat the competition. Just like you might haggle the price of a new car, trade-in offers are also negotiable.
6. Read the Fine Print Before Signing on the Dotted Line
Once you’ve chosen which offer to accept, make sure you read all the fine print of the contract.
Double check that the price of your new car is what you’re expecting. Some car sellers may attempt to increase the new car’s price to make up for agreeing to a high trade-in price.
The Benefits of Trading in Your Car
Trading in a car when you’re buying a new one can be beneficial in several ways.
No Hassle to Sell Your Car on Your Own
When you trade in your car, you don’t have to deal with the work of selling your used car on your own. It’s a fairly quick, easy process.
A private sale means you need to advertise your car, schedule test drives and deal with prospective buyers. You might need to make repairs ahead of time to attract buyers, whereas a dealership is more likely to accept a trade-in that needs some work.
Reduce the Amount of Your New Car Loan
Trading in an old car will decrease the cost of your new vehicle — providing you don’t have negative equity in the car you’re trading in. This can be especially helpful if you’re financing your next vehicle.
A trade-in with significant value can lower or eliminate the down payment on your next car or help to lower your monthly payments.
If you’re buying your new vehicle in cash instead of financing it, a trade-in reduces the amount of money you’ll have to pay.
Potential Tax Break on the Sale of Your New Car
In many states, you’ll only pay sales tax on the difference between the new car price and the value of the trade-in. Trading in your old car means you’ll pay less in sales tax for your new vehicle.
The Downsides of Trading in Your Car
It’s important to also know the disadvantages of trading in your car before you decide to hand over your keys.
Lower Trade-in Value
The trade-in value you get for your old car will likely be less than if you sold your car on your own to a private seller. This is because the dealer needs to make a profit on the resale of your trade-in vehicle.
If you’re willing to put in the work and resources to sell your car privately, trading in your car may not be the best option for you.
Limited Options for Your New Car Purchase
A trade-in is a two-part transaction. You’re essentially selling your car to a dealer in exchange for buying a new car from them at a discounted price.
This means, you have to get your new car from whichever dealership you’re trading in your old car. If that dealership doesn’t have the exact car you want to purchase, you have to settle for the cars they have available.
Your other option is figuring out where you want to purchase your new car and trading in your old vehicle there, but you might have to settle for a trade-in offer that’s not the best deal you could get.
Higher Payments if You’re Upside Down in Your Old Auto Loan
If you have negative equity in your car (you owe more than what it’s worth), the dealership might offer you the option of absorbing the remaining balance of your old loan into your new car loan. This could increase the monthly payments on your new loan or the time it takes for you to pay that car off.
Frequently Asked Questions (FAQs)
Yes, you can trade in a car when you still have a balance on your car loan. If your trade-in value is more than what you owe, the dealer will pay off your old loan and apply any remaining money toward the cost of your new car. If the value of your car is less than what you owe, you’ll have to make up the difference out of pocket or roll the difference into your new auto loan.
Trading in a car makes sense when you want to avoid the hassle of selling your car on your own and you have enough value in your car to reduce the price of a new vehicle.
The trade-in value of your current vehicle will typically be lower than the retail value of a car of the same year, make and model because the dealership needs to make a profit when reselling your car. The dealership absorbs the cost of having to clean, repair and market your vehicle to potential buyers.
The trade-in value will also be lower than the price you’d get selling your car to a private seller. If you opt to sell your car on your own, you’ll have to put in the time, money and effort to make the sale happen.
Nicole Dow is a former senior writer at The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.