The value of your trade-in and whatever amount you may still owe on it is one of the most important factors involved with buying a new car. Any equity that you have in your trade-in should add to your purchasing power, for example. But it is also possible however to have negative equity in a trade-in as we will see later. It’s easy for car dealers to confuse you when it comes to how your trade-in equity affects the deal, so we need to spend some time here and sort a few things out.
First I need to expose a little game most dealers play when it comes to your trade. It’s called the ‘trade-in allowance’ game, and it’s important that you know how it works. Take a look at the sidebar Trade-in Game to see how two different dealers might present the same deal:
As you can see, the bottom line is the same. Why do car dealers do this? Two reasons. First it can disguise the fact that the dealer is buying your car wholesale, which is always the case. Second, it allows the dealer to tell you what you want to hear. If they sense that you are most interested in a big discount, they’ll play it that way. If you seem more interested in what your trade-in is worth, viola! They can present it to you any way they like, a one thousand dollar discount and a nine thousand dollar trade allowance still leaves you with a ten thousand dollar trade difference. It’s easy to become confused and frustrated here.
My advice is not to involve your trade in until after you get prices. In any event two things you’ll want to do are understand the value of your trade and compare apples to apples.
Understanding the Value of Your Trade
When you trade your car in to a dealer, you’re selling it wholesale whether you realize it or not. The wholesale value of your car is approximately what it would bring at a dealer auction, and is hundreds or even thousands less than the going retail price.
Now I know what you’re thinking, If I sell my car myself, then I’ll keep the extra money. You’re right, you will and if you can, you should. But you should also keep a few things in mind. You will need to advertise your car, field phone calls, make appointments (some of which may not show and some of which you’ll wish didn’t) as well as let strangers take your car for test drives and accommodate scheduling appointments with their mechanics, only to have them haggle down the price you wanted for your car.
Consider also potential hassles with financing and timing. You may find someone to buy your car, but you may still owe money on it. This means they need to pay you first and then wait while your bank processes paperwork before getting title to their new car. Not everyone will be willing to do that. Plus, after going through all the hassles already mentioned, you may need to wait for them to either sell their old car or get approved for financing themselves.
And let’s assume you finally sell your car. Can you time things such that you can sell your car and buy a new one without an inconvenient gap where you have no car? Don’t get me wrong–If you can sell your car private sale, go for it. But unless someone is beating down your door with cash in hand you may want to consider trading.
So what is your car worth? You’ll want to know both the wholesale (Actual Cash Value or ACV) and the retail value. Both prices can be found in a current edition of the N.A.D.A. Used Car Guide or Kelley Blue Book for your area. (There are different regional issues) which can be found at the library, bookstore or on the Internet. It is important that it is a current issue since the values can vary by hundreds of dollars from one issue to the next. It is also important that you use this guide properly. (Add or subtract for mileage, etc.) And remember that the book is a guide, not law.
The automobile market is as volatile as any market on Wall street, and a number of factors can affect the value of your car positively or negatively. Some cars are notoriously ‘soft’ which means they often bring less than book value while other cars are ‘strong’ and usually bring book value or more. If you want to fine tune your figure, try to compare the book value to what similar cars are selling for in your area. Once you have calculated the ACV, you need to deduct from it any balance that you may still owe on the car. Call your bank and get an accurate payoff amount. The amount left over is your equity in the car. For example:
Cash value of trade in = $13,000 Loan Balance/Payoff $ 8,000 Your cash equity $ 5,000
What if you have negative equity?
If you find yourself owing more than your car is worth or ‘upside-down’, don’t panic. This is more common than you might think! First consider selling your car private sale to try and get more for it than its wholesale value. Also use your down payment or any other cash available to you to make up as much of the difference as you can.
If you still find yourself upside-down, you may consider keeping your current car a little longer and continue paying it off. If all else fails, you can roll the negative equity into the new car. You are in essence financing your negative balance along with the cost of the new car. This is possible by paying full price (or perhaps more) for a car and using any discount you would have gotten to pay off the negative balance on your trade-in (Remember the trade-in allowance game.).
Even though this happens all the time (Most people are just unaware that they are doing it,) it should be your last option since it sets you up for being really upside-down next time you trade. Many people continually roll more and more negative equity into new purchases. Eventually this catches up with them because banks limit the amount that they will lend on each car. I have seen people owe over five thousand dollars more on their car than it is worth. Obviously this is trouble. One option that may help here is leasing. I will explain leasing in detail in the buy vs lease section.
Compare apples to apples.
Remember the example earlier of the ‘trade allowance game?’ If you shopped both dealers, what might go through your mind? ‘I want to get the high trade-in value of Dealer #1 and get the discounted price of Dealer #2. That would be a great deal.’ Well, that will never happen. And this is the source of much frustration.
The important thing is that you focus on the trade difference figure, that’s the important number. After you sell your car and buy the new one, how much did it cost? What’s the bottom line? Dealers are going to present the deal to you the way they want to, what you want to do is to look for the best bottom line.
Sneaky Stuff to Watch Out For:
‘We have a buyer for your trade.’
It can be exciting to think that the salesperson already has a buyer lined up for your trade-in and as a result will pay you Big Bucks for your car. Of course you need to trade it in immediately.
Devalue your trade-in.
‘We would give you more for your car but it needs X which cost $300, and Y which cost $500 and a Z, that’s $200.’ The dealer will use anything he can find to put a big price on repairing and use it to negotiate down the value of your trade-in.
Writing in code
Dealers write numbers they don’t want you to know (your ACV, profit on your deal, cost, etc.) in a simple code. Instead of using numbers, the first ten letters of the alphabet are used. A=1, B=2, etc., J=0. Thus if you see ‘CJJJ’ written on a trade-in appraisal sheet, you just got a $3,000 ACV for your trade-in.
This is one area where dealers will really underestimate you. They will use this in plain sight on paperwork that they use, and may even hand to you to review. You’ll be amazed at what you can easily find out now that you know their ‘code’.
1.Make sure the car is clean in and out.
2.Trade before your odometer turns the next ten thousand mile increment (29,000 is better than 30,000 etc.)
3.You may want to repair or replace damaged or worn items that are highly visible (cracked windshield, worn tires, etc.). But don’t bother with things you can’t easily see like a tune-up, shocks, brakes etc. You won’t get any more money from an appraiser for things he can’t see.