how does trading in a car work?

wondering what to expect when trading in your car? here's a breakdown of how the process works, including what you can expect to receive in return.

trade in car

trading a car isn’t always the best option, but it can be beneficial for some. before you explore the various options, it’s helpful to know how trading in a car works. 

in this guide, we walk you through the easiest way to trade in your vehicle. we also discuss how to handle the trade in if you owe money on your vehicle.

how to trade in a car

before you trade in the car, you want to know what it’s worth by looking at the kbb value. you should then clean it up before you start asking dealerships for offers. once you get the offer you want, it’s time to make an appointment and go over the details with the chosen dealership. 

1. find its worth

you don’t want to visit the dealer unprepared or you will have to take their word for what your vehicle is worth. instead, do your own research and figure out what you should get for your vehicle.

you can use a tool, such as kelley blue book, to run the vehicle by its vin. this tool shows you the private party price, dealer price and trade-in value. it’s the trade-in value that you want to focus on. if your vehicle is in good condition, you can expect to get an offer equivalent to this value. otherwise, be prepared to take some money off for any damage or issues. 

2. clean up the vehicle

you want the vehicle to look its best before it needs to go for any inspections. a simple car wash and interior detail can go a long way to getting you a better price.

just like when you sell your car privately, you want people to believe that you took care of the vehicle. a clean interior and spot-free exterior can give that impression. 

3. ask for offers

in today’s technological age, you don’t need to leave your home or office to get trade-in offers. you can browse dealership websites and submit a request. 

in many cases, you can expect to get an offer within minutes. while you can get offers from multiple websites, it’s often best to stick with the one where you want to trade the vehicle. 

4. make an appointment

if you are satisfied with the offer, it’s time to make an appointment. schedule a time to sit with the dealership and review the terms. 

during this visit, you can also shop for your new vehicle while they perform an inspection of the trade-in model. once you are ready, all of the paperwork can be done at the same time. remember to have your car title and other critical information with you to save time. 

related: how do car dealers make money? (6 ways)

trade-in lowers the cost of a new car

if you are looking at purchasing a car for $18,000 and your trade-in will give you $4,000, the new cost you can expect to pay is just $14,000. this is how much you need to finance or pay in cash to drive away with the new car.

most states only make you pay the sales tax on the net cost. with the trade-in, you save some money on taxes versus if you sold the car privately and paid for the new one with cash.

related: what is an auto broker? can they save me money?

can you trade-in a financed car?

trade ins are the best option when dealing with a financed car because selling it privately can be a pain. however, there are different processes depending on if the car loan has positive or negative equity. here are some things to consider.

trading a car with positive equity

the best option when trading in a financed car is to have positive equity. this simply means that less is owed on the vehicle than what it is worth. by making extra payments or putting a good down payment on the car at the beginning, you can ensure it keeps positive equity.

with positive equity, you can sell the car privately. with that money, you could pay off the loan and put the remaining amount on your new car or pocket it. however, it’s much faster and easier to choose the trade-in option. at the dealership, the trade-in value will be determined and the staff there will handle paying off the car. they will also use whatever is left on the new purchase or give it to you as cash if you desire. 

related: how to transfer a car lease to another person (4 steps)

trading a car with negative equity

if you can avoid this situation, it’s best. however, it’s still possible to trade in your vehicle when you owe more than it’s worth. believe it or not, this situation happens a lot when only minimum payments are made on the car loan. 

if you trade in a vehicle with negative equity, the dealership will use the value given to you and pay down the loan. the remainder of the loan will be rolled into your new payments, which puts you behind the ball. to avoid this problem going forward, you want to pay more than the minimum payments whenever possible. 

when to trade in a financed car

1. positive equity

if your financed car has positive equity, you should absolutely consider trading it in. you can either make money on the vehicle or put it towards the new one. 

either way, your superior financial choices have paid off, putting you in great shape to upgrade your ride. evaluate the differences between trading in versus selling it privately to determine which option is better for you. 

related: how to safely sell your car

2. high ownership costs

when you first signed the car loan, your situation might have been different. maybe you had a better job or fewer expenses. 

sadly, life can change, leaving us with higher ownership costs than we anticipated. if you need something that costs less money, go ahead and trade it in.

3. can’t afford it

when the car is in a negative equity situation, you should still trade it in if it has become impossible to pay for it. the last thing you want is to have a car repossession on your record.

instead, let the dealer give you the trade-in value and roll the payments into something else. you should choose something extremely low-cost temporarily, just so you can get back on your feet. 

4. great deal on new car

at the end of the year, many dealerships will offer deep incentives to move the old inventory. this is one of the best times to purchase a new car and a good time to consider trading in a financed vehicle.

what you might not have been able to afford suddenly becomes a reality during these events. work out your budget to see if it makes financial sense to you. 

when to keep a financed car

1. negative equity

as we’ve previously discussed, it’s not fun to trade-in a vehicle with negative equity. you are going to end up rolling this amount into your new loan, putting you behind right from the start.

however, there will be circumstances beyond your control causing you to choose a trade-in anyway. just make sure you have carefully thought about every other option first. 

2. newer loan

if you’ve recently started the loan, you probably don’t have a lot of equity in the car. when you drove the new car off of the lot, it instantly dropped in value.

plus, there could be penalties for ending the financing agreement this early. make sure you understand any fees and penalties you will be responsible for. 

3. been in an accident

if you’ve been in an accident, the car might not be worth what you think it is. vehicles in good shape with a clean history have one resale value and that drops dramatically once an accident is on the record. 

the dealership will need to look over its condition to determine how much less your vehicle is worth. if it needs repairs, those will also need to be factored into the equation. 

read more: 15 most common causes of car accidents

4. low ownership costs

if you are close to paying off the loan, you might want to wait. once the loan is paid off, you will have no more commitments monthly, leaving you open to saving up for a new car.

this is a great way to get ahead, especially if the car is still in good shape and running well. however, you will want to trade-in the vehicle before it isn’t worth anything, making this a delicate balance.