Trading in Your Car: Understanding the Value, Benefits, and Process

When it's time to part ways with your trusty vehicle and transition to your next set of wheels, the process can be emotionally and logistically challenging. Even an economical and dependable daily driver like a Toyota Corolla can become more than just a mode of transportation over the years. Fortunately, car owners have several options for selling their used vehicle and purchasing their next one.

The most common methods include selling your car privately, selling it 100% online, or bringing it to a car dealership and offering it as a trade-in while buying your next vehicle. While selling your car entirely online is quick and convenient, trading in your car can reduce headaches and provide a sales tax benefit in many states. If you're taking out an auto loan, your trade-in can even serve as your down payment (or a portion of it, depending on your credit score and the terms of your new loan). However, trading in your current car also means relinquishing most of your control over the transaction. So, how do car dealerships determine the value of your trade-in? And what happens to your car after you hand over the keys?

Factors Influencing Your Car's Trade-In Value

When considering a trade-in, the first question on most car owners' minds is, "How much will the dealership give me for my vehicle?" The answer depends on several factors:

• Age and mileage: Newer cars with lower mileage generally command higher trade-in values.
• Make and model: Some vehicle makes and models are more desirable than others, impacting their resale value.
• Condition: The overall condition of your car, including its exterior, interior, and mechanical components, plays a significant role in its trade-in value.
• Options and features: Certain options and features, such as a premium sound system or advanced safety features, can enhance your car's value.

While Motorvero offers a trade-in value estimator, it's important to understand that no dealership will offer you as much money for your car as you could potentially earn through a private sale. This is because dealerships acquire vehicles from various sources, primarily trade-ins and auctions, and they have no incentive to pay you more for your trade-in than they would pay to acquire the same make and model from an auction.

This immediately limits the potential value of your car. Considering that the auction price must be lower than the car's retail price for the dealership to make a profit, the chances of your trade-in value exceeding its market value are effectively zero. In some cases, particularly when trying to meet a monthly sales goal, a dealership might slightly increase the value of your trade-in to secure a sale. However, they will likely make up the difference by pricing your new vehicle higher.

Think of it as a balancing act when buying a car: You can negotiate a lower price on a new car or a higher valuation on your old car, but expecting to achieve both is unrealistic.

The Sales Tax Advantage of Trading In

While trading in your car may not always yield the highest possible value, it does offer several benefits, including simplicity and a potential tax advantage. If you live in a state that charges sales tax (excluding Delaware, Montana, New Hampshire, and parts of Alaska), understanding how trade-ins can impact your tax obligation is crucial.

Let's say you're planning to buy a new Subaru Outback in Vermont, where the sales tax rate is 6%. The price of the Outback you want is $35,585 with a couple of options packages. Through skilled negotiation, you manage to get the dealer to offer it for a sale price of $34,000. Without a trade-in, you'll have to pay $2,040 in sales tax on your purchase, bringing the total out-of-pocket cost to $36,040.

Now, let's factor in a trade-in. The dealer evaluates your old Subaru Crosstrek and offers you $16,000 for it, despite its bright tangerine orange pearl paint. By agreeing to trade in your Crosstrek, the dealership will subtract $16,000 from the purchase price of your Outback, reducing the pre-tax cost to $18,000. With a 6% sales tax, you'll only owe $1,080 in taxes.

Not only did you negotiate more than $1,500 off the MSRP, but you also saved nearly $1,000 in taxes. This is the beauty of how trade-ins work in states with sales tax. Additionally, if you're financing this car purchase, the lower total amount on the new auto loan will impact the payoff amount and continue to benefit you over the life of your loan. Even if the lower loan amount translates to only slightly lower monthly payments, when you factor in the interest rate offered by your lender, you stand to save a significant amount of money in the long run.

Trading In a Financed Vehicle

If you're planning to trade in a car that you've financed, the status of your loan balance will influence the amount of cash you receive for the vehicle. If a dealership offers you $10,000 for your used vehicle and you have a remaining loan balance of $5,000, you're in a positive equity situation, where the value of your vehicle is greater than the loan balance. In this case, the dealer will typically buy out your loan when taking the car's title from you, netting you $5,000 of the $10,000 offer.

However, if you own a car worth less than the value of its auto loan, you're in a negative equity situation. For example, if the dealership offers you $10,000 for your used vehicle, but you owe $12,000, you would owe the dealership an extra $2,000 after trading in your car so they could pay off the old loan on your behalf. Negative equity (also known as being upside down on a loan) often occurs when an auto loan includes a high interest rate, a long term (such as 84 or 96 months), or both. In these situations, sellers are generally best served by searching for the best price possible, whether that comes from a private party or a dealership.

Selling Your Car 100% Online

When you trade in your car, the dealership has a couple of options. They can either invest in reconditioning your car and put it up for sale on their own lot, or they can send it to auction, where another dealership will purchase it. Dealers can maximize their profit by selling a car themselves, but only if they're confident the car will sell quickly. Less desirable cars are more often destined for the auction block.

You can now sell your car 100% online with Motorvero, as well as other companies like Kelley Blue Book, Edmunds, and CarMax. These companies use algorithms to estimate a vehicle's worth, which they can offer you thanks to their network of dealerships in the market for used cars.

Motorvero leverages an expansive pool of data to predict the current market value of a car. When you sell your car through Motorvero, a dealer in their system can either choose to keep the car to sell on their own lot or sell it to an auction house, which puts it on the auction block with the goal of making a profit.

With these instant cash offers, the result is a streamlined, hassle-free process for you. In addition to getting an instant offer, you can use Motorvero to sell your car online to a local dealership. This is essentially the trade-in process taken online, without the need to buy a new car as part of the transaction. Simply provide details about your car to help Motorvero gather multiple offers, drop the car off at the dealership you've chosen, and then either accept your payment as a trade-in price or take it in cash. This approach offers the convenience of online selling from the comfort of your home while retaining valuable in-person elements like test drives if you choose to buy another car.

The Bottom Line on Trading In Your Car

As with most aspects of the car-shopping process, it's wise to shop around when seeking a trade-in valuation. Run the numbers on sites like Motorvero, explore valuations from various companies, call some dealerships, and see who's willing to give you the best deal. Remember that the trade-in is only one of the five levers of a used car deal (or six, if you're shopping for a new car), and a disciplined dealer won't usually boost a trade-in value just to move a car. If a trade-in offer seems too good to be true, pay close attention to the other elements of the deal.

By understanding the factors that influence your car's trade-in value, the potential sales tax benefits, and the process of trading in a financed vehicle, you can make an informed decision when it's time to sell your current car and purchase your next one. And with the option to sell your car 100% online through platforms like Motorvero, you have more flexibility and control than ever before in the car-selling process.