In 2020, borrowers refinanced their car loans earlier into their term, the lowest since 2013. Last year was a big year for auto loan refinancing. Nearly all states registered more auto loan refinance applications, and 16% more Americans applied for refinancing in 2020 compared to 2019. Borrowers also chose…
Convenience versus cash — is trading your car a better option than selling it privately?
It’s common to see drivers cycle through several vehicles over the years. According to CNBC, the average person will drive over nine cars in their lifetime, and it’s easy to see why.
From longer commutes requiring better gas mileage to a growing family in need of space, your choice of ride will need to fit your present lifestyle. Maybe there have been some changes financially within your family that require a cutback on vehicle spending. According to Experian, the average new car payment in the U.S. today is $554.
Whatever the reason may be, you’ve decided a change is needed.
The problem many face is deciding between the convenience of trading in a vehicle or the extra money that is saved by selling it privately. So what’s the best option for you?
What Does It Mean Trade In a Car vs. Sell It Privately?
Trading in a vehicle is different from traditional car buying. Think of it more like an exchange for store credit. The dealership will assess your vehicle’s condition and will let you know what they’re willing to give you for your trade-in. This trade-in value will essentially act as a down payment towards your new car.
Selling your own car, on the other hand, is exactly what it sounds like — you sell your vehicle to a private party. You handle the entire process, from advertising to titling. Selling a car is no easy feat, but if you have the time and patience, you can get more for your vehicle than if you were to go through the dealership. Finding potential buyers will be your most difficult task as a private party.
Chances are, you want you out of your current vehicle to get into a newer make or model. This usually means the new car you’re getting into costs more than the old car you’re trading in or selling, so the difference is either paid for up front or financed over a length of time.
The Pros and Cons of Trading In a Vehicle
Trading in a vehicle for a new one is not something to be taken lightly. It’s a contract, and many people have gotten the short end simply by not knowing their price points, budgets, or not paying attention to details.
- Simpler transaction: The dealership has a whole team to handle the sale if you trade. You don’t have to hassle with finding a buyer for yourself.
- Quicker process: Dealerships can have you in and out with a trade in as little as a few hours. Compare this to waiting months for you to try and sell your car on the open market.
- Tax advantages: Many states offer tax credits for trade-ins, taxing only the net cost (purchase price of the new car minus trade-in value). These sales tax savings range from around $200 to $500.
- Less money: The dealership will only give you the trade-in value of the car which lower than what you’d make with a private sale.
- Limited options: Trading with a car dealership limits you to only what is in their inventory, whether it’s a new car or a used car.
The Pros and Cons of Selling Your Car Privately
If you’d like to take a more hands-on approach to upgrading your current car, here’s what you need to know about selling it privately.
- More money in your pocket: By cutting out the middleman and deciding the selling price, you can now make more from the sale.
- You’re in control: The entire process is yours to own. You set the terms and the pricing that you want to set.
- Buy your next car when you’re ready: When it’s all said and done, you decide which vehicle to buy. You’re not limited to the options one dealership provides.
- Not a quick process: As noted before, selling is a long game. You could be potentially waiting for a buyer for months. This means you will continue to pay for the car loan and its insurance until it sells.
- Potential for scams: Selling your car yourself is risky. Online vehicle sale fraud is common on sites like Craigslist and eBay. Be safe, and don’t take personal checks, gifts, or wire transfers.
- Documentation can be tricky: Selling a vehicle requires a good amount of back and forth with a buyer, including confirmation of payment, test drives, title transfers, and involving the insurance companies.
Should I Trade in or Sell My Car if I Have a Car Loan?
Whether you trade in your car or sell it, the auto loan balance will still need to be paid. If the vehicle sale doesn’t payoff the loan balance, you’ll be responsible for the rest.
Selling your car yourself will get you more for it, but a dealer is much more convenient. However, depending on how much you owe on your auto loan and what your vehicle’s value is, trading it in may not make sense for you.
Determine whether you have negative or positive equity. Negative equity is when the car’s value is not enough to cover the loan balance. This is also referred to as being upside down on the loan. Positive equity is the opposite; it means your car is worth more than what you owe on it.
First, get your loan payoff amount from your current lender. Check your latest statement or log into your account to get that information.
Next, estimate your current car’s value. You can find different types of car values on sites like Kelley Blue Book, Edmunds, and NADA.
Then, use a calculator to get the loan-to-value ratio, or LTV. An LTV over 100% means you have negative equity, under 100% LTV means you have positive equity.
Car (LTV) Loan-to-Value Calculator
If you’re looking at trading in your vehicle, the dealership will determine how much your vehicle is worth. If you have positive equity, the dealership will use this as a credit towards your trade and take care of settling your current loan before financing your new vehicle. If you’re upside down, you’ll need to pay off the remaining balance or roll it over into the new loan (the latter is not recommended).
If you’re selling your car to a private party, you set the best price so you can get more for it. If you owe a lot on your current auto loan, this will help you pay off more — hopefully all — of your balance.
Alternatively, if you decide to wait on trading in or selling your car for now, you can opt to refinance your auto loan. You can use those monthly savings to pay down your principal on your car loan to pay it off early or at least gain more positive equity.
Choosing to Trade in or Sell Your Car
This process can seem daunting at first. The good news is you have choices. You are not bound to an unhappy vehicle relationship. Whether you are trading, selling, or refinancing, review your situation, and don’t be afraid to explore your options.