Trading In Your Car: How It Works, What It’s Worth, and Common Mistakes to Avoid

The Biggest Trade-In Myth That Hurts Your Deal

Here’s why. Once you’ve ground the dealership down to its last penny over price—or even put them into the red— how much do you think they’ll have left over to give you for your trade? More? Or less? In fact, most dealers will be grateful to you for dropping a trade-in on them at the last minute because it gives them a chance to make back what they gave up trying to get to your ridiculous price, so contrary to what the armchair experts tell you, parachuting your trade-in will only hurt its value, not help it. (By the way, this cute little tactic requires you to lie. Which is what we hate about car salesmen, right?)

Now’s a good time to ask, what exactly is trade-in value, and how is it determined? Car dealerships have two basic questions when evaluating your trade: Is this a car I can resell? And if it can be resold, what will it bring in this market at this time? It’s always the market that determines any vehicle’s value.

How Dealers Really Calculate Trade-In Value

If a car is 13 years old, has 150,000 miles on it, and has numerous issues like bald tires, non-working A/C, and a knocking engine, it’s not something a dealer will be able to resell—not without excessive reconditioning costs. They’ll probably sell it to a wholesaler or take it to auction, which means you won’t get top dollar for it.

The way a dealership calculates the value of a trade doesn’t involve a Magic 8 Ball or Ouija board. The process begins with documenting the mileage and Vehicle Identification Number, or VIN, then walking around the car and looking for damage. Next comes driving it and checking for problems. Does the A/C work? Do all the windows go up and down? Is the headliner sagging? Does it smell of cigarette smoke? And so on.

Then the appraiser hooks up a scanner to the car’s computer to see what codes appear. All this data is fed into software that looks at all the cars that match your car in terms of year, model, trim level, mileage, and condition within a certain geographic area. The software shows the manager what the asking prices for all these cars are and what they’re bringing at auction— sometimes even actual transaction prices.

This data is used to determine the Actual Cash Value, or ACV, of your car to the dealership. That’s the number that, if the dealership suddenly went out of business the next day, it could sell your car for at auction. Note: The ACV has nothing to do with what you owe on the car. If you owe zero, it’s not worth zero. If you owe $1 million, it’s not worth $1 million.

Then the manager decides what the allowance will be. The allowance is how much money the dealership is willing to give you for your car. Here’s where the shell game begins. If you’re buying used, there’s probably not a huge amount of flexibility in what you can get for your trade (unless the dealer stole the car they’re selling). But if you’re buying new, there can sometimes be quite a lot of flexibility depending on the brand. Some manufacturers offer big rebates and/or behind-the-scenes money called Dealer Cash that the dealer can show you in the form of a discount or that can be applied to your trade value. (Caution: Not all manufacturers use rebates or Dealer Cash.)

How does this work? Let’s say the ACV of your trade is $15,000, but you want 18 for it. If the dealer has a rebate or dealer cash worth $3K, it can show you $18K and make you a happy camper. But the fact is, the dealer itself it still only giving you $15,000. The difference is being paid by the manufacturer, not the dealership.

So far, this is all based on the assumption that you owe nothing on the car you’re trading in. But what happens if you do owe money on it? Or worse, what if you owe more than it’s worth? We’ll examine that scenario in our next exciting episode of Care Salesman Confidential. Stay tuned!