Trading in may be a convenient way to sell your current car and put that money toward the cost of a new one. Knowing the following terms may help you walk into the dealership with the confidence to negotiate a better deal.
The trade-in value of your car is the amount that your dealer is willing to offer you to buy your vehicle. This amount can be influenced by a number of factors including the vehicle’s age, mileage and condition, demand for such a model, and your location.
Once you have agreed on a trade-in value with the dealer, a trade-in allowance should also be established. The allowance is the amount by which the dealer will reduce the cost of your new car as a result of trading in your old one. This is like a credit from the sale of your existing car that is put toward the purchase of your new vehicle.
Retail value represents the amount of money for which the dealer can expect to sell your trade-in vehicle to another party. The dealer will be looking to sell the vehicle for a higher price than they paid for it, which may include the cost of any reconditioning work. Research the market value of your car and take that into consideration when you negotiate the trade in. An alternative to trading in is to sell your car privately, which will typically get you a higher price, although it requires more time and effort.
When you get to the stage of purchasing and financing your new car, the loan value is the amount of financing that the lender is willing to provide toward the purchase. This amount can depend on a number of factors including your financial stability, credit score, trade-in amount, down payment, and the conditions of any unfulfilled loan on your current car.
Negative equity, “upside down” and “underwater”
Negative equity, also known as being “upside down” or “underwater” on your car, is when you owe more than your vehicle is worth. It’s a good idea to check whether you have negative equity as it may affect whether you still want to purchase a new car now or wait until you have positive equity. If you decide to go ahead and trade in with negative equity, depending on how the trade-in is handled, it could weaken your position when financing a new purchase.
When trading in an “upside down” car, many times the dealer will offer to “roll over” the outstanding loan balance into the new loan. Rolling over will increase the size of your next loan and the associated financing costs on that note. Your dealer should disclose all the terms of the new loan to you before signing.
Apply for a car loan before trading in
If you’re looking to trade in and purchase a new or used vehicle, RoadLoans may be able to help. Use our auto loan calculators to work out what you may be able to afford, taking into account your trade in and any down payment. Then apply for financing and get an instant decision. If approved, you can shop already knowing how much car you can afford and the terms of your loan.