Trade-In Value: The Complete Truth

October 28, 2019 in Trade-In Value

The number one thing people struggle with when they’re buying a new car is the trade-in value for their old car. So don’t worry - if you’re feeling confused about your trade-in value, you are definitely not alone. 

The purchase of a new car should be a euphoric experience - getting behind the wheel for the first time, breathing in that new car smell, and putting on those unforgettable first few miles. That’s what buying a new car is really all about, right? 

But drivers consistently report that purchasing a vehicle is one of their least favorite activities, mostly because of problems with the trade-in. How are you supposed to know what your old car is worth? How do you know if you’re getting a fair price? And how do you mentally prepare yourself before trading in your car? 

What if we told you that trade-in value doesn’t have to be the elephant in the dealership showroom? 

That’s right. You don’t have to let your trade-in value mess up your new car buying experience. We’ve created this simple guide to help you navigate the pitfalls of trading in your car. So let’s get started. 

What is Trade-in Value? 

When you’re shopping for a new car, trade-in value is the amount a dealer will give you for your old car. That amount can then be used as a down payment towards the purchase of another vehicle in their inventory. 

There are many reasons why trading in your car is a good idea. And the only alternatives are to keep your old car, which isn’t practical for most people; or to sell the car yourself, which presents plenty of problems on its own. 

There’s the hassle of getting your car buyer-ready, writing advertisements and marketing the car to the right audience, screening responses, meeting with potential buyers and negotiating the price; and that’s before you even start thinking about the legal paperwork ahead. 

Similar to using a realtor to sell your house, trading in your car at the dealership can save you valuable time and eliminate potential liabilities associated with selling your car privately. 

But the #1 reason to trade your car in is the tax break. In most states, you will only pay tax on the difference between the price of your new purchase and the trade-in value of your old car. So, the portion of the price that’s covered by your trade-in is essentially tax-free! 

Getting an Online Trade-in Estimate (a.k.a. Guesstimate) 

If you’ve ever used a trade-in calculator online, we’re willing to bet the experience left you puzzled. The results of any online “car quiz” can be tricky to decipher, and here’s why. 

Online trade-in estimates are created by algorithms. In other words, they are completely computer-generated. There is no “live help,” no “dial 0 to speak to an operator,” or any other way for these calculators to give you any personal assistance. 

As an average driver, you fumble through the questions, taking your best guess at each one. Which transmission is it? Do I have the premium audio package? No idea. Then you click a button and the trusty calculator spits out a completely useless range of magic numbers. 

Rather than knowing the value of your car, you’re actually more confused than you were before. Should you go by the retail number, the private party number, the trade-in number or the wholesale number? Is your car in fair condition or good condition? Come on… who really knows if their car is in fair or good condition? What a ridiculous question! 

If you’re like most people, you choose a number from the high end of the spectrum, and head out to the dealership to find out what they’ll really give you. Unfortunately, this often results in a disappointing experience when the dealer explains why they’re offering a number from the low end of the spectrum. 

This is why we refer to online trade-in estimates as guesstimates. And it’s probably the #1 reason why people have a bad experience at the car dealership, and eventually walk away without getting the new car they’re after. 

What’s the Difference Between Retail, Wholesale, Private Party, and Trade-in Value? 

Figuring out what your car is worth can be very confusing. Even after you enter all your car’s details, its mileage and condition, most online calculators will still give you a wide range of value estimates. So, which one of them applies to you? 

Here’s a quick overview of common valuation terminology you’re likely to come across while researching your vehicle: 

Wholesale Value

Wholesale value refers to a vehicle’s price at a dealer auction. Car dealerships (retailers) can purchase vehicles for their wholesale price. The dealership then incurs the costs of transporting the vehicle; making it market ready by cleaning, detailing, and repairing any mechanical problems; advertising the vehicle for sale; and handling all related paperwork along the way. 

Retail Value

Retail value is the sticker price that is advertised on a car at a retail outlet. Retail value includes the wholesale cost of the car, plus all of the costs incurred by the dealer including transport, cleaning and detailing, mechanical repairs, advertising and administrative costs, as well as the dealer’s markup (or profit margin). 

Private Party Value

Private party value is the price of the vehicle when a sale takes place between two private parties (neither of whom is a licensed dealer). Typically, private party value falls somewhere in between the wholesale value and the retail value. 

Sellers may receive a slightly higher price by selling their car to another private party, but they will also incur many of the costs that are typically incurred by the dealer, including cleaning and detailing, mechanical repairs, and advertising costs. Additionally, they will be responsible for managing all of the required legal paperwork and they assume the liability and risk of coordinating with potential buyers who want to see and test drive the car. 

Buyers may pay a slightly lower price than they would pay at a dealership, however their purchase will include no warranty and no finance options. They will also lose access to the potential tax break that they may have received by trading in their old car (see above). 

Trade-In Value 

Trade-in value is the dollar amount a dealer offers you for your old car, when you are shopping for a new car. Trade-in value can be used as a down payment towards the purchase of your new car. Many factors can influence your trade-in value, including your geographic location, mileage, damage and accident history, and the cost of reconditioning your car for resale. 

Salvage Value 

When a car cannot be sold, it can be salvaged. In plain English, this means “sent to the junkyard.” A car’s salvage value reflects the total value of all of its reusable parts. Some parts, like the frame and engine, are actually worth a fair amount of money. Other parts like knobs, switches, and valves, can sell for a dollar or two. The total of all the reusable parts is the salvage value. 

Salvage value can be assigned by an insurance company after an accident, or by a salvage yard when a dealer drops off an old trade-in that cannot be resold. 

Is Your Car Fair, Average, Clean, Good, or Very Good?

We have a saying here at The Appraisal Lane, “Every car is as unique as the person driving it.” It might sound simple, but it’s a real truth we’ve discovered in the process of evaluating hundreds of thousands of cars. 

Every car has a unique personality and history. And its real trade-in value will be affected by those experiences. The bottom line is that the amount of reconditioning a dealer must do to sell the car will dictate its trade-in value. So when you’re evaluating the magic range generated by an online trade-in calculator, ask yourself, “How much effort will my car realistically require?” 

Keep in mind, there are many more factors a dealer’s appraiser will look for when determining your car’s trade-in value. Here are a few of the most common: 

  • Options and Trim - What trim package do you have? Is it a base model, or is it loaded? Leather or cloth seating? What options do you have? Have you added any after-market equipment? And if so, was it professionally installed? 

  • Your Car’s History - What has happened to your car? Does it have excessive mileage for its age? Has it been stored in a garage or exposed to the elements? Has it experienced flooding or hail damage? Has it been involved in any accidents? What were the quality of any repairs? 

  • Recalls - Has your car been recalled? What were the nature of the recalls, and have they all been addressed? 

  • Aesthetic Issues - Are there any aesthetic issues that need to be addressed? Does your car have exterior dents or door dings? How does the interior look? Are the seats worn? Are they covered in pet hair? Does the car smell of smoke? Are there spills and stains? 

Digging into the Details of Your Car’s Trade-in Value 

You’ve loved your ride like it was a member of your family, but will you be able to get top dollar when the time comes to trade it in? Everyone knows their car’s condition will be a factor in determining its value, but these are some frequently overlooked details that the dealer will probably take into consideration. 

Market Conditions

While most people don’t know it, the market for cars fluctuates just like the markets for stocks, precious metals, and real estate. Automotive markets have recurring patterns that emerge by region and season - and these patterns are compounded by market saturation at any given time. 

For example, let’s say you’re ready to trade a convertible Mustang you purchased three years ago. You’ve taken excellent care of it - kept it in your garage every night and parked as far as possible from the cart corral at the grocery store. You pull up to a dealership in Detroit, knowing that all your hard work to keep your sweet ‘Stang in pristine shape will pay off. But will your convertible fetch the same price during a Michigan winter as it would down in the Sunshine State? Probably not. 

Make and Model 

You’re ready for a new vehicle. And you spent your whole Saturday spiffing up your pride and joy. Will the Lexus dealership you’re scoping out give you top dollar for your GMC pickup truck? 

If your vehicle does not match the dealership’s consumer demographics, you’re not as likely to score big on your trade-in. In fact, that Lexus dealership will take your trade-in, but they’ll probably have to send it to the auction and settle for wholesale value. 

In other words, you could receive a lower trade-in offer simply because it will be hard for the dealership to sell your make and model - even in top condition - to their unique clientele. 

Dealer Incentives

You’ve been driving your Infiniti QX30 for two years now. You’ve loved its engine and sporty styling, but your family has grown, and it’s time for an upgrade. When you roll into your local Infiniti dealer, you notice a sign out front offering huge incentives on QX30s. Uh-oh.

If a dealership is flooded with newer models of the car you want to trade, and they are actively trying to unload them with a special sales event, your QX30 isn’t going to be as valuable as it would have been at another time - and you’re likely to see that reflected in your trade-in offer. 

While this is simple supply and demand, it’s a factor that’s often overlooked by drivers when they’re trying to make a deal. 

A good rule of thumb to keep in mind is that your car is worth exactly what someone is willing to pay for it. And often, the things we think are outstanding features about our cars simply don’t match up with what buyers are looking for right now. 

That suspension lift that you love so much, for example, might not appeal to an older buyer. Factors like these often catch drivers off-guard, and unfortunately, they can spoil the entire trade-in experience. This is why it’s important to understand the entire trade-in process before you visit your first dealership. 

Why Am I Getting Trade-In Value Instead of Private Party Value? 

Hopefully, now that you have a better understanding of the dealer’s process, you’ll also have a better grasp on the dollar amount you’re being offered for your trade. But many people still question why they don’t get private party value, or retail value, when they’re trading in. 

If you’ve ever sold your home, you know that some repairs are inevitable when you’re entering into the contract period with a potential buyer. Similarly, dealerships must recondition, repair, and market your vehicle before they can offer it for sale to a new owner. 

Because very few cars show up ready for resale, a dealership will incur costs bringing the trade-in up to speed. For example, all trade-ins must be cleaned and detailed. Mechanical problems must be addressed and missing parts must be replaced. Almost every trade-in requires minor maintenance such as an oil change, alignment, and tune-up. 

The bottom line is that the dealer will need to invest in your car in order to turn it around and sell it to another buyer. And that investment will be reflected in your trade-in offer. 

If you’re determined to get private party value for your car, the trade-off is that you will need to handle all of the repairs, cleaning, maintenance, marketing, and administrative tasks yourself. You’ll assume some legal liability, and you’ll take a pass on any tax breaks you could have gotten by trading in. 

The Cost of Wholesaling a Trade-in 

If your trade-in is not a good fit for the dealer’s market, it must be relocated to a dealer auction where another dealership might purchase the car. While most people aren’t familiar with the ins and outs of a wholesale auto auction, it’s actually an expensive proposition for a dealer. 

The dealer pays for a truck to transport the car to the auction, they pay an auction fee to list the car for sale, and then they pay another fee if the car is sold. If the car is not sold, the dealer can either pay to store the car until the next auction or pay to have the car transported to another location. 

Dealers refer to these expenses as disposition costs. And if your dealer doesn’t intend to resell your trade-in at their dealership, those disposition costs will be taken into consideration when they make you an offer on your trade-in. 

How Can I Negotiate My Trade-in Value? 

Now that you’ve completed our crash course in trade-in value, you’ve got a pretty good idea about what to expect when you drive to the dealership. 

We know this can be an intimidating process, especially if you’re a first-timer. But if you do your homework, you can feel good about wheeling and dealing with the pros at the dealership. 

Here are a few last minute tips to help make your trade-in experience the very best that it can be: 

Shop the Market

Surf the internet and arm yourself with all the knowledge you can find. You can’t expect to hang with the big dogs if you aren’t prepared. Check sites like Facebook Marketplace, Craigslist, and eBay Motors. Check local used car lots to see what your make and model is currently going for in your area. 

Don’t Expect Retail 

When you’re doing your online research, keep in mind that the numbers you’re seeing are retail prices and/or private party values - not trade-in values. Remember everything we discussed above, and let the dealer know you understand their options and the associated costs. 

Be Honest 

It may be tempting to withhold information, or maybe bend the truth… just a little. Don’t! The information you provide can be verified easily with tools such as CarFax, and that’s not a good way to start your negotiation. If you’re caught being dishonest about your vehicle’s history, your sales rep will wonder what else you’re holding back, and they’ll likely assume the worst. The end result is that you’ll lose your credibility, and your leverage. 

Get an Independent Appraisal 

We hear every day that trading in a car is an overwhelming experience for many drivers. If that’s the way you’re feeling, you are not alone! 

One way to bypass the stress and anxiety of trade-in negotiations is to get an independent opinion from a professional third-party appraiser. That’s where we come in.

The Appraisal Lane has reinvented the trade-in process. No ranges. No estimates. We give you an exact number in 30 minutes or less. 

Unlike online trade-in calculators, there are no algorithms here. We use a team of real live appraisers to give you an actual offer you can redeem for cash or trade-in value at a dealership near you. And best of all, it’s absolutely free!