How trading in a car actually works

The five steps

A trade-in is really two transactions happening at once: you are selling a vehicle and buying one, and the dealer nets the difference. Here is the sequence.

1. The appraisal. Someone walks the vehicle, checks the VIN and history, looks underneath, and usually drives it. This takes fifteen or twenty minutes at most lots.
2. The offer. You are given a figure for your vehicle. It should be a standalone number, not tangled up with the price of what you are buying.
3. The payoff. If you still owe on it, the dealer contacts your lender for a ten-day payoff figure. This is the exact amount needed to clear the loan.
4. The arithmetic. Your vehicle's value, minus any payoff, comes off the price of the one you are buying. That result is your equity.
5. The paperwork. The dealer handles the title transfer and settles your old loan directly with the lender.

Ask for the numbers separately

This is the single most useful thing to know. There are three numbers in a trade deal: the price of the vehicle you are buying, the value of your trade, and the financing terms. They can be moved against each other, which means a generous-sounding trade figure can quietly be funded by a higher purchase price.

Ask for each number on its own, written down, before you agree to anything. A dealer who is comfortable with what they are offering will not mind. It is a reasonable request and it takes thirty seconds.

Negative equity, explained without the euphemism

If your payoff is larger than what your vehicle is worth, you have negative equity. People also call it being upside down or underwater. It is common, particularly in the first two or three years of a loan on a vehicle that depreciated quickly.

The important thing is that the shortfall does not disappear when you trade. It gets handled one of two ways: you pay it, or it is added to your new loan. If it is added, you are financing your old vehicle and your new one at the same time, which means a larger balance, a longer term, and a real chance of being upside down again on the next one.

How the appraisal number is reached

Year, make, model and mileage set the starting point. After that, appraisers are asking one question: what can this realistically be sold for, and how much work does it need first?

• Title status. The biggest single factor. A salvage or rebuilt title reduces value sharply and limits who can finance it. More on that here.
• History report. Reported accidents, number of owners, and whether service was recorded.
• Mechanical condition. What needs doing before it could go on a lot.
• Keys. Modern keys are expensive to replace. Two keys is worth real money over one.
• Local demand. What that vehicle actually sells for around here, which is not always what a national estimator suggests. Four wheel drive trucks hold value differently in North Georgia than they do in Florida.

Trade in, or sell it yourself?

A private sale usually brings more money. You are doing the work the dealer would otherwise do, and taking the risks: advertising it, meeting strangers, handling test drives, making sure the payment is genuine, and sorting the title yourself.

A trade is faster and simpler, and in Georgia there is a tax point worth knowing. Trading reduces the taxable amount on your purchase, so some of the gap between the two prices comes back to you. Rules change, so confirm the current position for your situation, but it is frequently enough to narrow a difference that looked large on paper.

What to bring

• The title, if you hold it
• Valid driver license
• Every key, including spares
• Service records if you kept them
• Lender name and account number if there is still money owing

Common questions