Car Buying

Why Is Trade-In Value Lower Than Retail Value?

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author photo by Autotrader March 2019

The trade-in value of your car is just one measure of its worth. If you use a used-car value calculator on an online site like Autotrader's sister company Kelly Blue Book's Trade-in Value calculator to determine what your car is worth, it offers more than one value. It provides an instant-cash value, a trade-in value and a sale-by-owner value. These various values can differ by hundreds, if not thousands of dollars.

Why Trade-In Values Are Lower

There are many variables at play in determining a car's value, but arguably the most important factor is, does the transaction involve two people as buyer and seller, or does it involve a dealer and a person? Often consumers feel cheated when trading in a car that winds up on the dealer's lot two days later selling for an additional 15- or 20-percent or more than they were given at trade in. Basically the difference is because there was a dealer in the middle of the sale that needs to make some money, too. A direct person-to-person transaction would have brought the seller more money.

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 to see what other dealerships are willing to offer for your vehicle.

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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.
Why Is Trade-In Value Lower Than Retail Value? - Autotrader