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Why is Trade-in Value Lower Than Retail Value?


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:

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.

The result:

  • 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.

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Editor’s Note: This article has been updated for accuracy since it was originally published.

FAQ

What is trade-in value?

The trade-in value is the amount that a car dealer is willing to offer you toward the purchase price of a new or used car in exchange for your old car.

Will I make more money selling my car privately or trading it in?

An independent sell-by-owner transaction allows you to set the asking price for your used car. Whether you sell the vehicle at that price depends on the current market in your area, but you can keep all funds from the sale. The dealership wants to make money, too, so the trade-in value of your ride might be less because the dealer incurs expenses with preparing to sell the car at a retail price.

How do dealers determine retail price?

Dealers are in the business of selling automobiles. They set prices on used cars to sell them quickly and profit from the sale. Factors they consider include model, trim level, optional features and equipment, mileage, and overall condition. Cars that are clean and in good shape sell faster.

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7 COMMENTS
  1. I bought a new car a few months ago.  A web search gave me the typical dealer price for the equivalent of my old car.  $15,000 was retail.  I also knew the average cash price for the new car. The dealer examined my car and offered $15,000 trade in.  I thought, wow, good, excellent.  I called dealers in a 200 mile radius for the least net cost to me with that trade in value.

    In order to match the best offer, on the last day in October, my local dealer added $2600 to the trade to match my best offer.  Even if I could have sold my vehicle for $2600 more than a dealer, however unlikely that was, it would have added another $880 state tax to the cost of the new car.  It seems counter intuitive to imagine making out better in a sell rather than trade scenario.   Maybe the dealer would have offered a cash discount greater than $3480 if I have paid cash, I can’t say.  I’ve a difficult time imagining that, but it could be true.  I surely didn’t think I could somehow sell my car for more than dealer retail or $1500.

  2. this articles must had been written by someoen who got paid off from the auto dealership industrt , so lame .. i had sold every car i own on my own and had double and i none ocasion almost triple what dealerships had offered me for my vehicles, at the end of the day ask youraelf this ? whats more convinient ? ,… give away a3 to 6thousands dollars to a dealership or put that amount in your pocket ?? think people   , think !! 

    • “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.”  Why would you say that this article is written by a “paid off” person from dealerships?  This quote is straight from the article…. Maybe you should read the entire article

    • Insurance companies typically pay market value, not what you owe. Therefore, if you overpaid to begin with or just happen to have your car stolen in those early years of new car ownership where depreciation hits hardest, you may get less for your car than you owe even though it’s fair market value.

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