If you are a car owner looking to upgrade, change your lifestyle − or you’re even experiencing a mid-life crisis − you may want to consider trading in your vehicle. By doing so you could conveniently get rid of your aging, used car and put that money toward a new ride. If you do want to trade in, knowing these terms may help you walk into the dealership with the confidence to negotiate a better deal.
Trade-in value and/or allowance
The trade-in value of your car is the amount that your dealer is willing to offer you to buy your old car. This amount can be influenced by a number of factors ranging from the condition of your car to the car you are interested in buying. 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 “out the door costs” of your new car as a result of trading in your old one. This is like a credit from the sale of your used car that is put toward the purchase of your new vehicle.
Unlike trade-in value, which is more dealer controlled, retail value is more dictated by the market and buying public. It represents the amount of money for which the dealer can expect to (re)sell your used car to another party. A dealer may be able to sell your car for much more than they allow you for the trade in, so research the potential market value and take what you find into consideration when trading in. Ultimately, you may decide it more advantageous to try and sell the car on your own and then just buy a new car without a trade-in.
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 of the car. This amount can depend on a number of factors including your financial stability, credit score, or even the conditions of an unfulfilled loan on your current car. In order to get the most favorable financing, you may need to pay off any current auto loan.
Negative equity, upside down and rolling over
When trading in, dealers may offer to pay off the balance of your loan on your current car, despite the cost. Be careful to make sure you do not get into a situation of negative equity (also referred to as being “upside down” on your car loan) where you owe more on your loan than the car is actually worth. You need to look closely at the terms of your trade in. Some dealers may mislead customers into thinking they will pay off any outstanding loan even if the balance is higher than the total worth of the car being traded. Many times they will simply try “rolling over” a portion of the original loan balance into (or on top of) the new loan. Dealers are supposed to disclose all the terms of a loan.