So it's time to trade in your car, and you're excited to see just how much money you can get to put down on your next auto loan. How much you can get from your car varies by how much a dealer is willing to give you for your trade. If the offer seems too good to be true, you could be paying for it in the long run – literally.
Vehicle Value vs. Amount Owed = Equity
How much you can get from your car depends on many factors, including the condition of your vehicle, the current stock on dealer lots, and how popular your particular make and model of car is. Whether or not the price you can get for your vehicle is a good value depends on if it has equity or not. If you still owe on an auto loan, and your car is worth more than you owe, you have equity. If you own it outright, its total value is equity.
So, when it comes to trading in for another vehicle, it makes sense to go to the dealer offering you the most for your trade.
Doesn't it? Maybe not.
Negative Equity Borrowers Beware
There are some cases where a dealership may offer incentives to get you in the door. Some dealers run events known as push, pull, or drag events, where they may guarantee a minimum trade-in amount for a vehicle in any condition. Another example of an offer that may cost you is when they offer to pay off your current loan, no matter the amount.
These may sound like you're getting the most money out of your car, no matter what shape it's in – but what if your trade-in isn't worth the amount being offered? If you're in a negative equity position, offers that sound too good to be true can cost you.
The most common incentives you need to watch for are minimum trade-in allowances and rollover financing. Let's take a look:
Minimum Trade-In Allowance:
Some dealerships may offer a minimum allowance for vehicles, and in some cases, it's doesn't matter if they're working or not. Minimum trade-in allowance on a car typically means that a dealership is willing to pay X amount of dollars for every car that comes in, even if they're not worth it.
For example, a dealership may advertise that they'll give you at least $1,000 for your trade no matter what. If your trade is only worth $300, this likely sounds great!
However, there are usually stipulations in the fine print. This may include language such as: that you must finance another vehicle from their stock, or, that they have no-haggle or bottom-line pricing.
So, without being able to negotiate the price of your next vehicle, the $700 the dealer paid in excess of your old car's value is typically added to the cost of the next car you finance.
Dealerships that promise to pay off your trade no matter what may land you in the same boat, or worse. This means they're willing to pay off your current loan even if the vehicle is worth less than you owe.
If you have negative equity in the vehicle you're looking to get out of, it means that the dealership is paying off your loan even though the car they're getting from you isn't worth enough to cover that cost. For example, if you're trading in a vehicle that's worth $5,000 and you still owe $8,000 on the loan, you have $3,000 in negative equity.
That extra cost is added to your next loan, increasing the cost of the next car you finance by this much, and putting you even further underwater. The higher the loan cost, and the lower your credit score, the more you end up paying in interest charges. Remember that a rollover loan means paying off two cars at the same time, so you may be required to take on a long loan term with a high interest rate.
Save Money With a Trade-In
The above tactics can be deployed for many reasons, including enticing borrowers to come into the dealership or encouraging people to sell vehicles they've been hanging onto. It's a seller's market right now, which means you may be able to sell your current vehicle for what seems like a big profit.
However, the next vehicle you're likely to need is going to cost you that much more, too. To combat this, here are a few ways to get the most for your trade-in:
Negotiate your new auto loan first. Once you've settled on a purchase price for your next car and signed the initial paperwork agreeing to that price, then bring up your trade. This way the dealer can appraise your vehicle and offer you a price to purchase it. Since the transaction is being conducted separately, it doesn't factor into your financing, and you can then apply the amount you get to a down payment on your next car.
Save your service records. The more documentation you have showing that your car was well cared for, the better. It's also a good idea to print out a vehicle history report for your car to keep with the paperwork. Having the legwork done for a dealer can save time and may lead to a more favorable deal when they may look at your trade.
Clean up your car. Having a clean and tidy vehicle can help a dealer look more favorably on the trade, but don't come into a dealership with fresh detail and a car devoid of all personal belongings. This could signify that you're desperate to get rid of it and might make a dealership leery. You could buff out scratches, and pop-out dents, but don't sink a ton of money into a car you don't want to keep. Dealerships can make repairs for less, so leave the big-ticket fixes to them.
Trade-In With Confidence!
If you're ready to get moving on your next set of wheels, The Car Connection wants to help. We work with a network of dealerships that spans the nation and can connect you with a dealership that's signed up with special finance lenders. These lenders work with borrowers who have many credit challenges, including no credit, bad credit, and even bankruptcy.
Don't hesitate to get on the road to your next auto loan by filling out our fast, free, no-obligation car loan request form.