How to Trade a Car When Buying or Leasing a New Car
The process of trading a car is often misunderstood by inexperienced car buyers
Some common questions we frequently hear are:
- How does trading a car work?
- Can I simply trade one car for another?
- How much will a dealer give me for my trade?
- Can I trade if I’m going to lease a new car?
- What if I still have a loan on the old car?
- Can I trade for a cheaper car and lower my payments?
- Can I trade my leased car?
Let’s try to answer these and other questions about car trading.
What is trading? How does it work?
When trading a car, a dealer is actually agreeing to buy your old car from you, at a specified price, and applying that price as down payment credit toward the purchase or lease of your new car. However, the price you are offered is a wholesale price since dealers are in the business of selling vehicles at retail price and making a profit on the difference. Therefore it’s a dealer’s objective to pay as little as possible for a trade vehicle, in order to maximize his profit potential when he sells it. You should already know the approximate trade value of your vehicle (check kbb.com and nadaguides.com) before you visit a dealer. This way, you’ll have a good idea of the price you should be negotiating for.
The newer your trade vehicle, the lower the mileage, the better the condition — the higher the trade price you’ll receive. Dealers are anxious to get good cars for their used-car lot. However, if your trade vehicle is an old beat-up model with lots of miles, don’t expect to be offered much money for it. It’s very likely that a dealer doesn’t actually want the car and will offer you very little. He’ll then ship the car off to a dealer’s auction where he’ll try to recover his money. The car will usually be sold to another used-car dealer who specializes in older, less expensive cars.
Since a trade vehicle is used as down payment credit toward the purchase or lease of a new car, it’s possible that no further money down will be required to get a loan or lease.
Can I trade one car for another?
Maybe, assuming the wholesale value of your trade vehicle is equal to the retail value of the other vehicle. Since you would be swapping wholesale value for retail value, the new vehicle would most likely be a lesser vehicle than the old vehicle, which doesn’t seem to be a smart thing to do. The consumer is always on the losing side of such deals.
In this sense, “trading” cars is not really trading, in the most basic form. Typically, a trade involves additional money or a loan (or lease) to get a newer, better vehicle — almost never a one-to-one trade.
How much will a dealer give me for my car?
It depends. If it’s a nice, clean, relatively new car in good condition that he wants for his used-car lot, you’ll get better offers. The key word here is “offer.” A dealer will almost never offer his best price as his first offer. Getting a fair price for a trade requires negotiation just like getting a fair price for a new car. Know the value of your vehicle (check kbb.com) and honestly assess its condition. If you are not the first owner of the car, get a Carfax report to find out if it has been wrecked or had a damaged title anytime during it’s life. Dealers will likely get the report, so you should know what’s in it before he does.
Try to keep the negotiations for a trade vehicle separate from the negotiation for the new vehicle. Dealers like to jumble the two transactions together to create confusion. Make sure a great deal on your trade car doesn’t pop up as an increased price on your new car. This is especially important when trading for a lease.
Can I trade if I’m leasing a new car?
Certainly. Whether you are buying or leasing, a trade works exactly the same way (except if your trade vehicle is leased — see below). In a lease, a trade acts as a down payment (cap cost reduction), which reduces the amount being financed in a the lease, which reduces monthly payment amount. In fact, when trading a car for a leased vehicle, the trade has a much greater effect (in reducing monthly payment) than when trading for a purchase.
What if I still have a loan on my trade vehicle?
This is often the “catch” in vehicle trade deals. It’s also one of the most misunderstood.
If you have an outstanding loan on a car want to trade, there are two pieces of information that are important: 1) the amount you still owe (payoff amount), and 2) the trade value of your car (the amount a dealer is willing to offer you).
Basically, a dealer will pay off your old loan and give you credit for the value of your trade vehicle — minus the amount he spent to pay off your old loan.
If the value of your car is greater than the amount of your loan payoff, no problem. However, after the amount of the loan payoff has been subtracted, you may not receive as much credit for your trade as you might have expected. For example, if your car is worth $10,000 and you still owe $8000, you only get $2000 credit toward the cost of your new car.
If the value of your car is less than the amount of your payoff, you are “upside down” which means you owe more than your car is worth. In this case, dealer will pay off your loan but will add the difference (negative equity) to the cost of your new vehicle, making it more expensive. For example, if your car is worth $10,000 and you still owe $12,000, the $2000 negative equity will be added to the new car’s cost.
If the amount of negative equity is too great, a dealer may not be able to “roll” the entire amount into a new vehicle’s loan or lease. In that case, the customer would have to make up the difference in cash as a down payment.
Can I trade for a cheaper car and lower my payments?
Maybe. But it depends on whether you owe less than your car is worth (see above topic). However, if you are “upside down” the negative equity applied to the cost of the cheaper car may actually make that car more expensive than the old car — and make payments higher, not lower.
Can I trade my leased car?
Maybe, but not usually. It is rare to have any ownership equity (trade equity) built up in a car lease, but it can, and does, happen. It’s a bit more complicated than trading a non-leased vehicle. For more details, see our article, Trade Leased Car – Good Idea or Not?