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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.
It's easy for car dealers to confuse you when it comes to
how your trade-in equity affects the deal.
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 we know what you're thinking, If I sell my car myself,
then I'll keep the extra money. You're right, 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 us 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.
Even though this happens all the time, 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. We have seen people owe over five thousand
dollars more on their car than it is worth.
Dealer tricks to watch for when trading in a
car
'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'.
Trade-in Tips
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.
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