Should you trade in your old car or sell it privately? The answer depends on how much work you want to put into selling it, and how badly you need the extra money the dealer will siphon off.
Taking cars on trade can be a significant profit point for a car dealer. Other profit points include the selling price, making money when arranging financing, adding optional equipment, and selling products like extended warranties and security systems when the final paperwork is completed.
Establishing the value of your trade is often done through old fashioned haggling, something most customers dislike doing. Yet, establishing the price of the trade is an important step in the car buying process. The less the dealer allows the more profit for them. The higher the trade value, the more money in your pocket and less for the dealer. How do you decide?
In this day and age, the Internet has independent websites that verify how much a vehicle is actually worth in your geographical area. You don't want a dealer alone to establish the price of your trade because they have a vested interest in making the value as low as possible. This makes independent sources of information a critical resource for the customer. Use websites such as Kelly Blue Book (kbb.com), TrueCar.com, and Edmunds.com for used car valuations.
Follow the Money
Today we want to look at two things: how much it will cost you to trade your car in AND how much a dealer hopes to make on your trade once they make a deal with you.
Let's take the example of a 2008 Honda Civic EX sedan with automatic transmission and 48,000 miles. This is how KBB.com breaks out the different values for this car:
-- Trade-in value: $12,375
-- Private Party value: $14,205
-- Suggest Retail value: $15,995
-- Certified Pre-owned (CPO) value: $16,335
If I were going to trade this Civic, I would expect to get $12,375 from a dealer in my area. This figure could be higher or lower depending on the dealer, local demand, and my negotiating skills. If I did the extra work to sell it privately, I would get substantially more: $14,205. The difference--$1,830--is what it costs me for the convenience of trading the car rather than selling it privately.
The next figure that KBB provides is the Suggested Retail value, or the initial dealer asking price of $15,955. This is not necessarily the actual selling price, but the initial price before negotiations, mark-downs, special sale pricing, and so on.
However, should the dealer sell it for this price they expect to make a gross profit of $3,620. To be fair to dealers, most will not actually pocket this much profit. Besides marking down the price, the dealer needs to deduct the cost of getting the vehicle ready for sale. At major dealerships, this figure can easily run from a few hundred dollars to $1,500 or more. New brakes and tires can be just the beginning of added costs the dealer faces.
The final figure that KBB provides is the initial selling price should the dealer decide to sell the vehicle as a Certified Pre-owned (CPO) vehicle. The added $400 in price is actually a good deal for the consumer. The dealer pays that amount--or more--to the manufacturer to register the vehicle as certified. The dealer also has added shop costs to both inspect it and bring it up to CPO standards.
Is it worth it to trade a vehicle to save time and the hassle of selling it yourself, knowing you're leaving money on the table? A lot of Americans do business this way, though in this economic downturn, more and more are deciding to sell privately so they keep more money in their pocket. In the end, each of us has to make the best decision for our specific circumstances. Good luck.
L. James Johnson is the guy who wrote the book on how to sell your car online: HELP! I Gotta Sell My Car NOW! New Rules for Selling Your Vehicle Online! is available on Amazon.com.