How Does it Work When You Trade in a Car?

Trading in a car is simple, but you easily can be taken advantage of if you do not arm yourself with a bit of knowledge beforehand.

Finding Trade-in Value of Your Vehicle

The first step in trading in your car should be a search on the internet or, if you are old school, a trip to the library. The search is so that you can arm yourself with an approximate value of your vehicle before you go to a dealership. The two most reliable sites to visit are Kelley Blue Book (kbb.com) and the National Automobile Dealers Association (nadaguides.com). Both companies publish book versions of their value charts for those of us who prefer something we can put our hands on.

Vehicle Condition:  Being Honest with Yourself

The values are based on the condition of the car, so you will need to be honest with yourself about your car’s condition. If it has a couple of small dings where a shopping cart hit it, you may claim good or better condition. If it has a dent the size of a basketball, you cannot. Seem silly to say that? There are people who are attached to their car and assume it is a great specimen, when in fact it has in excess of 200,000 miles, leaks like a sieve, and only starts if you hold your tongue on the right side of your mouth while standing on your head when you turn the key. These people are very surprised when a dealership will only offer salvage value for the vehicle.

Sticking to Your (Price) Guns

Now, once you have a value in mind, it is time to go shopping. Granted, even if you carry a copy of NADA Guides into the showroom with you, the salesperson is going to try to lowball you. Haggling is great fun to some, but a nightmare to others. Stick to your guns as much as possible, give a little if need be, but be prepared to walk out if the dealership does not come close to what you want.

How Trade Equity Impacts Your Purchase

Once you have agreed to a trade-in value, the loan process begins. If you do not have a current loan, it is simple. The agreed upon value (trade equity) is deducted from the agreed selling price, then you either pay or finance the balance. If you have an existing loan, there are two scenarios. In the first, the trade-in value is greater than your balance, so the difference between your agreed trade-in value and the loan is deducted from the sale price. In the second, you owe more than the vehicle is worth. In that case, the trade-in value is deducted from your loan balance. Any balance that is still remaining is added to the sale price of your next car and you must either pay for the total of the two or finance that total.

Issues with Loan-to-Value Ratio (LTV)

If you have a loan balance that must be carried over to the new car, you may find it difficult to finance the new vehicle because of the negative equity created. One of the most weighted aspects of a vehicle loan is its loan-to-value (LTV) ratio. Major lenders will not approve a loan that exceeds 115 percent of the value of a vehicle. You can learn more about how LTV works here.

Fortunately, there are loan sources other than major banks. Credit unions may allow you to carry a higher LTV. Even if a credit union denies your loan, do not despair. There are many online specialty lenders who look more at your personal situation than at the LTV of a vehicle.