How Do Car Trade-ins Work?

Many owners opt to do a car trade-in, which may be the best option for you. Let’s dig into what it means and answer that burning question every car owner has at some point - how do car trade-ins work?

HOME GUIDES How Do Car Trade-ins Work?

Carpages Staff

When you’re ready for a vehicle upgrade, you have several decisions to make. Do you purchase a new car or a used car? Should you buy or lease? Then, you have to decide what to do with your current vehicle. 

Many owners opt to do a car trade-in, which may be the best option for you. Let’s dig into what it means and answer that burning question every car owner has at some point - how do car trade-ins work?

What Is a Car Trade-in?

A car trade-in is a common choice for vehicle owners. It’s the process of selling your current vehicle to the dealership and putting the money toward the purchase price of another car. 

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Advantages of Trading in a Car

Car trade-ins remain a popular option for many people because they offer a few significant advantages over the alternatives. While the benefits of trading in a car can vary depending on the situation, these are some general advantages.

It’s Easy

Trading in your vehicle to the dealer where you want to purchase another one makes the whole process a one-stop-shop. Drive your current vehicle to the dealership, let them appraise the vehicle while you pick out a new one, then sign some papers, and that’s it.

Reduce Your Auto Loan

Applying the amount of your trade-in toward purchasing a different car means you need to finance less. Trading in your car can lower your monthly payments.

Tax Savings

Would it surprise you to learn that you can save money on taxes by trading in your car? Choosing to do a trade-in lowers the purchase price. Since you only pay taxes on the actual purchase price, you save some money.

Disadvantages of Trading in a Car

While trade-ins have some notable advantages, there are some downsides to choosing the trade-in route. Your car may be worth more than the dealer offers because they have to consider the business aspect. A dealer needs to know that they can make something off your trade-in. 

Additionally, if your vehicle is a popular model and the dealer already has several on the lot, you won’t get much for your trade-in. It’s possible that selling the car outright yourself could yield a bigger payday. 

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How Does Trading in Your Car Work?

Drive your vehicle to the dealer and let them know you want to trade-in your car. The dealer will evaluate your vehicle’s condition, including the body, mechanical components, and car tires, while you wait or shop for a replacement.

Once you learn the trade-in value and accept it, you complete the paperwork. You sign over the trade-in to the dealer and set up the financing for the new vehicle. That’s all there is to it; say good-bye to your old car and hello to its replacement.

Necessary Documents for a Car Trade-in

Before heading to the dealer, make sure you have everything you need to complete the transaction. Again, it is convenient because everything is handled at the dealership, but only if you have the requisite documents.

  • Personal identification to prove you can legally sell the car. Your driver’s license works.
  • The car registration is necessary to sign it over to the dealer. 
  • If you have an existing car loan, make sure you know how much it is and have the contact information for your financing company available.
  • If you plan to start a new car loan, you need proof of income and proof of residency as well.

How Do Car Dealers Determine Trade-in Value

Car dealers consider several factors when determining trade-in, including the vehicle’s age, condition, and mileage. They also need to consider what they can get for your car, which means determining if it’s sufficient to sell on the lot, sell to a wholesale auto dealer, or put it up at auction. 

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Can You Trade In Your Car for a Used Car?

Absolutely! You should be able to trade your car toward purchasing any car on a dealer’s lot.

How to Get the Most Money for a Trade-in Car

You can’t control every aspect of your car’s valuation, but you can take steps to ensure you get the most for your trade-in. Try to balance what you could get with how much you spend on fixing up your car for a trade-in.

Make Necessary Repairs

Driving onto the lot with your “check engine” light on probably isn’t a good plan. You may want to handle minor repairs, like small dings and nicks in the paint. Small repairs could go a long way in terms of the trade-in value. 

Clean It Up

Even an older car looks nicer when it’s cleaned up. There’s nothing wrong with a quick trip through the car wash and a detailing job on the interior. A car wash and detail should cost you less than $100, is that worthwhile for you?

Submit the Maintenance History

Keeping records of your vehicle’s maintenance is helpful for many reasons. Not only do you know when it’s due for another check, but you can also show the dealer that the car has been treated well. 

Know Your Car’s Worth

Do your research before heading to the dealership. There are plenty of ways to find the ballpark value of your vehicle, like Kelley Blue Book. Just type in some information about your vehicle to get an idea of the fair market value.


Once you know your car’s worth, you have some power to negotiate the trade-in value. It’s possible to save a few hundred dollars by knowing your car’s worth and leveraging it at the dealership.

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Should I Trade In My Car or Sell It?

Whether to trade your car in or sell it outright is a question only you can answer. For many people, the time and effort it takes to sell a car outright are not worth the hassle. However, if you have the time or know an interested buyer, it may be worth the extra money you could get.

It helps to weigh your options and consider your current circumstances. Answering these questions could help you make the best decision for you. 

  • How soon do you need a new vehicle? 
  • Do you have the time and means to sell your car outright?
  • Is your trade-in worth enough to substantially lower your purchase price?

Can I Trade In a Vehicle I am Currently Making Payments On?

It depends. There are two situations that this could apply in. First, you bought the car but still haven’t paid off the loan. Second, you are leasing the vehicle. 

Trade-in a Leased Vehicle for a New Lease

Depending on how much time you have left on the lease and your existing lease agreement, it’s possible that you could do a trade-in for a new lease. It’s important to understand how your existing car lease works, including fees and penalties, because they would apply to your new contract.

Additionally, if you went over the mileage or the car sustained damage, those costs factor into the new lease. If starting a new contract would cost too much, the leasing company may not agree to the trade-in. 

Trading in a Financed Car

It’s generally a little easier to trade-in a car you financed, depending on the amount you owe. First, the amount of your trade-in would apply to the outstanding financing. If it covers what you owe, then you would pay off that loan and start a new one for your new vehicle.

However, if your existing vehicle’s trade-in price doesn’t cover the remaining loan amount, you would have to roll over the excess into the new agreement. This creates negative equity, also known as an “upside-down” loan that you still need to pay off. 

Can I Trade In My Car with Bad Credit or Negative Equity?

Again, it depends. Though the situations may sound similar, they aren’t, but it doesn’t mean you can’t still do a trade-in.

Trade-ins with Bad Credit

If you have bad credit, it’s possible to do a trade-in. However, if your current car can’t cover a new car’s cost, you still need to find a lender willing to loan you the difference. Even if you find a lender, there’s a good chance you would pay a higher interest rate as well. 

Dealing with Negative Equity

Negative equity or an “upside-down” loan stems from trading in a vehicle for less than you own on it. It is usually possible to do a trade-in with negative equity. You just need to find a lender willing to take on the rollover from your existing loan on top of the new vehicle’s purchase price. 

For example, the dealer offers a trade-in of $5,000, but you still owe $8,000 on the car loan. You still need to pay the remaining $3,000, but if you find a lender willing to work with you, then you could roll over that amount into the new financing package. So, if your new car costs $15,000, you would finance $18,000 to cover the overage from your previous loan.

There are a few things to consider with a trade-in that results in negative equity. Expect larger monthly payments to account for the negative equity. However, you would not be able to complete a private sale if you have negative equity in a vehicle, so a dealer trade-in is often the best (only) option.

Time to Trade-in?

Trade-ins are easy, convenient ways to come up with a down payment on a new (or used) vehicle. The process is fast and handled right at the dealership instead of searching for a buyer and managing all payments and paperwork independently. Remember, you have plenty of options, and there’s always room for negotiation.

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