Maximizing Your Car's Trade-In Value in Today's Market

Introduction

When life presents challenges like low inventory, it might be the perfect time to consider trading in your car. The traditional wisdom holds that a new car's value plummets the moment it leaves the dealership. Specifically, a new car can lose up to 20% of its value within the first year. For new car buyers, this is disheartening, especially when you're still paying off the initial purchase price, taxes, and additional fees. For instance, if you put down 10% on a $30,000 car, you're still responsible for at least $27,000, not including taxes and fees, on a car that might only be worth $24,000 shortly after purchase.

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There are two perspectives to consider here. The first is that this is simply the nature of buying a new car, and ideally, you'll drive it long enough to justify the initial cost when it's time to sell or trade it in. The second perspective, often highlighted by financial experts, is that a new car is a depreciating asset, leaving you immediately underwater on your auto loan. While this is true to some extent, you're not alone—many people find themselves in this situation.

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What Makes Today’s Market Unique?

Supply chain disruptions are no longer breaking news, but the persistent microchip shortage continues to hinder automakers' ability to complete new vehicle production. With limited new cars available and dealership lots sparsely stocked nationwide, the demand for used vehicles has surged. Consequently, used car values have skyrocketed over the past year. On average, buyers are paying approximately 20% more for used vehicles in 2023 compared to 2022.

If you own an extra car or are considering downsizing your personal vehicle fleet, trade-in values have reached unprecedented highs as dealerships strive to replenish their inventories. But what does this mean for those currently making payments on a new car?

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How Can You Benefit From This Unusual Situation?

If you're making payments on a newer vehicle, the current market presents a golden opportunity to sell or trade in your car. According to MotorVero transaction data, approximately 80% of vehicle owners have positive equity in their vehicles, averaging around $8,000 upon trade-in as of November 2023.

• Average trade equity: Based on December 2023 MotorVero transaction data.
• Positive equity: In April 2022, only 55% of vehicle owners had positive equity, averaging $1,900 upon trade-in.
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Many people still need a car or truck for daily transportation, so how do high used car values help? In this scenario, the elevated trade-in and resale values of used cars can enable drivers to potentially upgrade to newer or better vehicles. The gap between the vehicle's current value and the amount owed is significantly smaller, and in some cases, owners may even pocket extra cash if their vehicle's value exceeds the outstanding loan balance. This financial advantage can be applied toward a vehicle that might have been unaffordable under normal market conditions.

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Staying One Step Ahead

Eventually, the car market will stabilize. Dealership lots will be restocked with new vehicles, and as a result, the demand for used cars will decrease, leading to a decline in prices. As a consumer, there are several strategies to consider if you're approaching a vehicle purchase in the current market.

Leasing vs. Purchasing: One option is to lease rather than purchase a new vehicle. Leasing allows you to avoid committing to buying the car at the end of the lease term. This flexibility can be advantageous if car values stabilize by the time your lease ends, giving you the option to return the vehicle without further financial obligation.

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Extended Financing Terms: Another approach is to explore extended-length financing options, such as 84-month loans. While these longer terms result in higher interest payments, they can lower your monthly payments, freeing up your budget for other expenses.