The trade-in value of your car is just one measure of its worth. Your car’s estimated value depends on how you get it off your hands.
Use our sister company Kelley Blue Book’s Trade-in Value Calculator to determine the vehicle’s market value in different transactions:
- Dealership trade-in value
- Private sale-by-owner value
- Charitable donation value
- Instant cash offer value
In today’s automobile market, a used car’s trade-in and retail price amounts can vary by hundreds — if not thousands — of dollars. The COVID-19 pandemic and manufacturing delays created a strong market for new and used cars. High demand and low supply of vehicles have raised the value of new and used cars by thousands.
Look at Your Options
The difference in an automobile’s monetary value can influence your decision to donate, sell, or trade the vehicle. There are many variables in determining a used car’s value for different types of transactions. Most of us base our decision to choose one over the other on the monetary amount. The ease or speed of the transaction is another factor to consider.
Selling a used car to another individual or trading it at a dealership are the most common ways to sell a car. Seeking an instant cash offer is a relatively new option for sellers. Donating a car to a charity might work for some people, but it’s often easier to use the other methods. Also, you’ll see a better monetary return with a direct sale or trade.
Why Trade-in Values are Lower
Consumers might feel cheated after trading a car that winds up on the dealer’s lot listed for 15% or 20% more than their trade-in offer. There is a simple reason for the difference in trade-in allowance and the dealer’s retail price of the used car.
The dealer — who needs to make money — is in the middle of the sale that moves a used car from its old owner to its new owner. On the other hand, a direct person-to-person transaction brings the seller more money.
Another reason that trade-in values are lower than retail prices is that most trade-ins need reconditioning. A dealer typically won’t sell a car immediately after receiving it in a trade from a customer. Instead, they devote time and money to get the vehicle ready for its next owner.
Dealerships wash and detail your trade to make it attractive to potential buyers. To help increase value, reputable dealers will even fix 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 below the car’s retail value so they can still make some money on it after the reconditioning is complete.
Sales Tax Considerations with Trade-Ins
In most states, tax laws are designed to benefit car owners indirectly and contribute to lower trade-in values. Many jurisdictions only levy a sales tax on the difference between a trade-in value and the retail price of a new car.
Suppose you’re purchasing a vehicle for $40,000, and you receive a trade-in allowance of $15,000 from the dealer. You will pay tax on the $25,000 difference and not the total price of the new car. This alternative creates an incentive for shoppers to trade their vehicles. It also means that dealerships can easily convince customers to trade their cars instead of selling them privately.
If the sales tax rate for automobiles is 4%, you save $600 in this example by not paying tax on the trade-in amount. A dealer might point out that its trade-in offer equates to a higher value because you would need to sell your automobile privately for more than $15,600 to come out ahead.
Remember that tax laws vary by state, and your circumstances may differ.
Sell it Yourself for Near Retail Price?
Some shoppers become stunned by a low trade-in value and decide to sell their car independently. Even then, sellers might find that the amount they can get for the vehicle doesn’t match what local dealers are asking for similar models. There are many reasons for this, including that people tend to trust dealerships more than they trust private sellers. However, financing is the biggest reason for a dealer’s higher retail price.
In many cases, a dealer gets more money for cars than an individual seller can because the dealership often provides financing. Very few private sellers can help with this service.
- Dealers get more business.
- They’re able to list their cars at higher prices.
- They appeal to a broader range of customers.
Still, there’s a good chance that you can get more money by selling your car on your own rather than trading it at a dealership. However, this isn’t always the case, especially with the common tax benefits of trading. Preparing your vehicle for a private sale will help you get the best price.
If you get a subpar trade-in offer, get a quote from another dealership and also consider selling your car privately. You shouldn’t have any difficulty getting your asking price or a good trade-in offer because the current automotive market is favorable for consumers wanting to dispose of their used vehicles.
Read Related Articles:
- Car Finance 101: Everything You Need to Know
- Should You Sell Your Car Yourself or Accept Kelley Blue Book Instant Cash Offer?
- Buying a New Car: Getting the Most Money for Your Trade-In
Editor’s Note: This article has been updated for accuracy since it was originally published.