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Car Buying

Why Is Trade-In Value Lower Than Retail Value?

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author photo by Doug DeMuro

If you're interested in trading in your old car for a new one, you've probably already heard the term trade-in value: the amount of money that a dealership will give you for your old car. It's often a little (or, in some cases, a lot) less than the retail value, which is the price that a dealership will use when advertising the car for sale. Why is there such a difference between trade-in value and the actual retail price? Shouldn't you be entitled to a little more of that money? We have the answer.

Why Trade-In Values Are Lower

There are many reasons why trade-in values are lower than retail values. One is simple: convenience. Many shoppers have no interest in going through the process of selling a car, which means they're more than happy to lose some money when trading their old car for a new one. The dealer also handles all of the paper work, meaning that the person trading in the car never has to worry about dealing with the DMV or getting an inspection or an emissions test.

Another reason trade-in values are lower than retail prices is that many trade-ins need to be reconditioned. In other words, most dealerships won't sell a car directly after receiving it in a trade from a customer. Instead, they have to put some money into washing it, detailing it, and even fixing worn or broken items such as paint, lights, audio systems and other functions. As a result, a dealer needs to offer a trade-in value that's below the car's retail value so they can still make some money on it after the reconditioning is complete.

In many states, local laws designed to benefit car owners also keep trade-in prices low. Many states levy a sales tax only on the difference between a trade-in value and the retail price of a new car. For example, if you trade in a car worth $8,000 and buy a car worth $10,000, you only pay tax on $2,000. This creates an incentive for shoppers to trade in their cars, and it means that dealerships have an easier time convincing customers to trade their vehicles instead of selling privately.

Sell It Yourself?

Some shoppers become so dismayed by a low trade-in value that they decide to sell their car on their own, but even then, you might find that the amount of money you can get for your car doesn't match what local dealers are asking for similar vehicles. There are many reasons for this, including the fact that people tend to trust dealerships more than private sellers, but the biggest reason has to do with financing.

In many cases, a dealership can usually get more money for its cars than a private seller because dealerships can provide financing -- a service that very few private sellers are able to help with. As a result, dealers get more business, and they're able to price their cars higher and appeal to a wider range of customers.

Still, we suspect you'll find that you tend to get more money by selling your car on your own than trading it in to a dealership. This isn't always the case, especially as you consider the tax benefits of trading in your car, but if you get an especially low trade-in offer from a dealer, you might want to consider selling your car privately using AutoTrader.com or by visiting AutoTrader's Trade-In Marketplace to see what other dealerships are willing to offer for your vehicle.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
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Why Is Trade-In Value Lower Than Retail Value?