How Does a Car Trade-In Work? Everything You Need to Know

A trade-in is a magical thing. It reduces the cost of a new car, gets rid of your old car, and puts a valuable bargaining chip in your pocket. The only question is, how does a car trade-in work?

In this guide, we’ll pull back the curtain and tell you everything you need to know about trading in your car. We’ll cover frequently asked questions, describe every possible situation, and give you some tips at the end.

What Is a Car Trade-In?

As the name suggests, a trade-in is when you give your car to a dealership for some money. By trading in the car, you can cash out on a number of different benefits.

Where Does a Trade-In Happen?

A trade-in almost exclusively happens through dealerships. There’s an opportunity for a private seller to accept a trade-in, but it’s a lot less common.

This is all thanks to the structure of a trade-in, which we’ll get into later.

Who Is a Car Trade-In Right For?

A trade-in is a good option for plenty of people across the world. This program is especially useful for people who want to buy a new or used car and they have a reasonable car in their possession.

If you already have a car that you own or are making payments on, you’re a potential candidate for a trade-in.

If you’re buying a new or used car and you want to save some money and get rid of your current car at the same time, this might be the best option for you.

Before leases really took off, trade-ins were the go-to method for a vast majority of Americans. You’re handing over your old keys to knock down the price on a shiny new set of wheels.

Unfortunately, the program doesn’t work for people who are looking to lease their next vehicle.

Understanding a Trade-In Value

When you drive your car to a dealership and shake hands for a trade-in, the dealership is paying you what’s called your car’s “trade-in value”.

It’s the amount of money the dealership is “paying you” for your car. Don’t get it confused though, they’re not physically handing you a stack of money. They are taking it out of the total that you owe them for the new car.

Here’s a quick example: You drive your current car to a dealership. You’re going to buy a hot hatchback for $30,000. The dealership says that your car is worth $10,000 to them. This 10 grand is the car’s trade-in value.

You’ll leave your current car with the dealership and drive off in your new hatchback after writing a check for a reduced $20,000.

The Time to Trade in Your Car

If you’re curious, here are some good times to trade in your car. This section will talk about the time of year, the time in your life, and some other factors that change over time.

Make Sure You’re Done with Your Car

The only time you can trade in your car is when you’re done with it. You’re essentially selling your car directly to a dealership, so you will lose possession of it.

Almost every trade-in is done when a car owner is tired of their current car for one reason or another and wants to drive off in a new one.

Do It During the Right Season

The rumor is that the best seasons to trade in your car are spring and summer. Car dealerships historically have more sales during these seasons, so they’re willing to spend a little more for your trade-in.

Keep an Eye on the Mileage

Dealerships will give you more money if your car has fewer miles. If it fits within your timeline, it’s always a good idea to trade in your car before you rack up the miles. This is the case if you’re looking to get the biggest potential trade-in value.

On the other end of the spectrum, you can also ride your car into the dirt before trading it in.

You’ll see that the depreciation of a car tapers off after around a decade and just slowly moves down to $0.

On the homestretch of your car’s life, the value won’t fluctuate too much. A 15-year-old car that’s worth $5,000 might only drop another thousand dollars in the next 5 years.

This means if you want to hold on to your car and drive it for as long as possible, that’s a very valid idea.

Avoid Prepayment Fees

Some loans have a stipulation that doesn’t let you pay your car off early without hitting you with a fee. If you trade in your car within the first 5 years, you might be subject to a prepayment fee and a penalty.

If that’s the case, then you might want to hold off on trading in your car.

Things You Need to Trade in a Car

There are some things you’ll need to have with you before you can officially trade in your car.

• The car. Okay, it seems obvious, but we need to point it out. You can’t trade in a car that the dealership can’t physically look at and test drive. If your car is parked in your driveway when you’re at the dealership, they won’t accept it as a trade-in — no matter how many selfies with the car you have.
• Loan details. You’ll need to know who your lender is, how much you owe, the account information, and the maturity of the loan.
• Driver’s license. This one’s easy enough. You’ll need it to drive yourself to the lot, to begin with.
• Vehicle keys and fobs. The keys, remotes, and fobs will be the property of the dealership after the trade-in is finalized. Make sure they have them or else the deal might be canceled or they might charge you extra fees to replace these.
• Proof of insurance. If your car is uninsured, the dealership might turn it down. Insurance also proves that you own the car.
• Vehicle registration. The registration should be in the glove box anyway, but you’ll need it for the dealership. They’ll use this to confirm that the vehicle is indeed yours.

The Two Types of Trade-Ins

We’re about to talk about a lot of different trade-in types, but they can all be lumped into two major categories:

Positive equity trade-in. This is when you owe less on a loan than the car is worth. If you owe the loan company $1,000 and your car has an estimated worth of $5,000, then you’re looking at a positive equity trade-in. It means that you’re ahead of the value. This is a good thing.

Negative equity trade-in. A negative equity trade-in is the exact opposite. This is when you owe more on the car than it’s worth. Owing $5,000 on a $3,000 car means that you’re upside-down (or in the hole) $2,000. It also means that you’re in a negative position for negotiations. This is a bad thing.

Trading in a Paid-Off Car

The easiest trade-in is when you fully own the car. The title is in your name and you don’t owe anyone for the vehicle.

This is a valuable bargaining chip you have in your back pocket when you get to the dealership. It can be used to leverage a much better deal on your new car.

In this option, you don’t have to deal with your lender at all and you can skip a few phone calls. You’re also in a better spot to walk away from an unfavorable deal.

You’ll drive your current car to the lot of your choosing and let the salesperson know you’re looking to trade it in. Also, let them know that you own it in full, so they can drop the gimmicks.

Trading in a Car You’re Still Making Payments On

If you’re still making payments, it’s not a huge deal. You can still get a sizeable reduction on the sticker price of your new dream car.

You’ll only be able to get a trade-in value that’s worth the equity you own in the car. That’s because you still owe the remaining balance before the car is officially yours.

Some dealerships will work with your lender and make all the necessary calls, but others will have you play phone tag to work everything out.

The dealership is going to transfer the title and loan into their name. It makes things a little confusing so you have to keep a close eye on how the numbers work. Let’s give you an example:

You want to buy a $42,000 new Lexus RC from a dealership. You currently have a car loan on your Mazda3.

Your Mazda3 is worth $15,000 according to Kelly Blue Book, and you owe $6,000 on your loan still. This means you physically own $9,000 worth of the Mazda3. That amount is the positive equity on your car.

After an inspection and negotiation, the Lexus dealership offers you a $5,000 trade-in value for your car. Once accepted, the dealership will transfer the title and loan into their name. In most cases, they’ll immediately pay off the remaining $6,000 owed to the lender.

Why would they do this? Well, now they have a $15,000 Mazda3 that they technically only paid $11,000 for.

The trade-in value goes towards a car that they’re already making money on. You’d have to ask their bookkeepers, but there’s a good chance they’re coming up way ahead on this deal. This is the case for almost every deal they make.

The trade-in value is essentially a gift card to their dealership.

Negative equity trade-ins are a last resort for most people. The new payment terms, interest, and price you get will be unfavorable. In the dealership’s eyes, they need to overcharge you to protect themselves in case the buyer winds up upside-down on the new car, too.

We’re not saying you can’t trade in your car if you have negative equity, we just recommend really thinking through the situation first. If you’re in trouble and desperately need to get out from under the car, this might be your only option.

Still, we would suggest paring down and getting a much less expensive vehicle than you currently have. Buying an older car like a Camry or Civic (which refuses to die) might be a good idea.

Within the world of negative equity trade-ins, there are three options:

Roll the Balance

A common option is to just roll the negative balance forward. Let’s say you’re upside-down $5,000 on your car. The new car you’re getting has a sticker price of $10,000.

You can trade in your car and just add $5,000 to the final price of the new car you’re getting.

In regular situations, this isn’t a great idea. It means that you’re overpaying for a car. In drastic situations, it might be what you need to keep your head above water.

For people in situations like these, we highly recommend you understand how much car you can afford. Signing up for a new car you can’t afford might force you to go upside-down again in the future, creating a nasty cycle.

Delay Trading In

Once you get “new car fever,” it might be hard to pump the brakes and delay a trade-in. However, if you’re already in the hole on your current car, it’s a good idea to kick the “new car” can down the road.

If you can wait long enough to correct the equity on your car, you don’t have to worry about the problems associated with negative equity trade-ins.

Keep in mind, you don’t have to wait until the car is completely paid off. You just need to catch up so that you can do a positive equity trade-in (instead of a negative equity one).

Pay the Difference

This is a very rare case, but it’s worth bringing up. If you have the cash on hand to pay the difference on your current loan to bring it up-to-date, then you can do that.

What does that mean? If you owe $10,000 on a car and the dealership will give you a $7,000 trade-in, then you’ll pay the loan company $3,000 and trade in your car.

This works under the assumption that you have enough money to bring your car loan down the car’s trade-in value.

Alternatives of Trade-Ins

If you’re not crazy about what you’ve read so far, don’t worry — there is an alternative to trading in a car: private sale.

If you sell your car to a private buyer, you’ll make more money in the deal. You can do a private sale whether you fully own the car or you’re still making payments.

The process takes longer, it’s a little trickier, and there is more opportunity to get scammed and lowballed. Even so, it’s a viable option that you should keep on the table if you’re not in love with the idea of a trade-in.

Know the Car’s Worth

We cannot emphasize this idea enough. You need to know what your current car is worth. Not what you think it might be worth, or what your buddy says it’s worth.

There are dozens of platforms online that all revolve around getting you a reasonable estimate for your car. Kbb.com is the biggest and probably the most reliable source. They have a free trade-in estimator that you can use.

They’ll need things like your location, mileage, year, make, and model of your car. They’ll also ask for the trim level, added equipment, vehicle color, and the vehicle’s condition. It’s imperative that you’re honest with each of these questions or else you’ll get an unfair evaluation.

Plugging in random data for a 2020 Audi A4 shows us that our fake vehicle is worth $29,217 in a trade-in and can fetch $33,336 in a private sale.

Now, we can go to the dealership with this figure in our head and ensure we’re getting a fair trade-in value.

Again, you’ll have to deduct from this value if you are still making payments. If we still owed $10,000 on our loan, the trade-in value would only be $19,217.

Check Your Credit

Your credit score will affect the final deal you get from the dealership. There’s not much you can do to improve your credit score short term, but it’s nice to know your score.

A higher score means you’ll get a more favorable deal, and lower interest, and the dealership will be more accommodating. With a lower score, you’ll either need a co-signor or you’ll just have to deal with the bad deal they offer you.

Clean and Detail Your Car

Okay, we get it — you’re not selling this car to a chump that gets easily distracted by a shiny hood and clean interior. Still, it’s a great idea to clean and have your car detailed.

Why? It’s all about presentation. If the car looks completely clean and polished, the dealership might assume that you took immaculate care of your vehicle for as long as you’ve owned it.

If they open the door and McDonald’s wrappers are falling out of the car, they might stiff you on the price. Moreover, they might add hidden detailing and cleaning fees to rectify the situation on their end.

A car wash and full detail aren’t too expensive anyway. For something that could save you hundreds or thousands of dollars, it’s worth a shot.

Be Ready to Say No

If the deal is bad, then you need to be ready to say no and walk away. Dealerships only make money if they offer you a terrible deal and overcharge the guy who buys your traded-in car.

Salespeople are really smart and can be sneaky. They can pretend you’re getting a great deal when you’re really getting conned.

If you’re okay with walking away, you’ll get the best deal possible.

Get Different Offers

There’s nothing exclusive when it comes to dealers offering trade-ins. In fact, you can email or call dealerships across the country to get an estimate on your trade-in. If a dealership a few states away offers you an incredible deal in writing, it might be worth the trip.

At the very minimum, get three different offers on your trade-in. This helps you put together a good comparison to see if one dealership is trying to screw you or not.

Read Anything Before Signing

Back to the whole “salespeople can be sneaky” point, you’ll need to read everything before signing it. In most states, the law is that a signature is legally binding. A signature also means that the person who signed fully read the contract and agrees with everything.

If you don’t read the contract, there are no takebacks.

A salesperson can tell you one thing, and the contract can say something completely different. It might be an accident, or it might be intentional. Either way, the contract has the final say. The terms, price, and structure outlined in the contract is what you’re agreeing to.

They might put the wrong trade-in value and overcharge you for the vehicle if you don’t carefully read it.

Pay Those Darn Parking Tickets

If you trade in your car, the unpaid parking tickets don’t disappear. You’ll need to make sure every ticket is paid for before the title is transferred. If there’s an outstanding balance you owe for tickets, the dealership might not be able to transfer the title at all.

Fix Damages or Pay (Literally)

This isn’t a threat, it’s something to remember while you’re on the lot. If you have damages to your car, you’ll need to fix them, or else you’ll get a decreased trade-in evaluation from the dealership.

When they arrive at their final trade-in value, it will take into consideration any damages that they’ll need to personally fix. Also, yes, they jack up the prices of their estimated repairs. An oil change that might cost you $40 can be estimated by the dealership to be worth $200.

It’s usually cheaper to fix it before you take your car to trade it in. At the same time, if you don’t care about your trade-in value getting sliced a little, then you can just deal with it at the lot.

You Might (Probably will) Get Low-Balled

Getting low-balled is almost a guarantee. The dealership needs to come up ahead so its doors can stay open and its salespeople can get paid.

They will very rarely pay you the estimated trade-in value that you find online. It’s a guarantee that the first trade-in value they present to you will be the lowest number. From there, you’ll need to negotiate and work your way up.

The Dealership Can “Lose Your Keys” After Their Test Drive

There’s a little scam that a dealership can do when you’re looking to trade in your car. They’ll routinely take it for a test drive while you’re looking at vehicles on their lot.

They’ll make you an unacceptable lowball offer, and you’ll get outraged and try to walk away from the deal. Then, the salesperson will claim that they don’t know where your keys went.

Maybe they’ll say someone gave it to so-and-so, and they just went on another test drive so you’ll need to wait another half hour. In the meantime, they’ll try to keep talking numbers with you and do their best to finalize the sale. Some buyers will get frustrated and finally give in.

Avoid this tactic: The easy way to avoid this? Bring a second set of keys with you. Tell the dealership they can mail their “lost pair” of keys to you once they “find them”.

The Dealership Can Deny a Trade-In

There’s nothing that forces a dealership to accept a trade-in or even make an offer on your car. If the vehicle is too expensive, too damaged, not desirable enough, or has a rough history, it can just pass on the deal.

Conclusion

Knowing how a car trade-in works is the first step to getting into your new car. It’s a great way to save money on a new purchase and probably get a better deal. If you want more car-buying guides, we have plenty of options on our blog. Make sure you have the right car tools and accessories to make it easy to own and operate your vehicle.