How Does Trading in a Car Work? Here Are 6 Steps

Trading in your old car at a dealership can help reduce the price of a new vehicle and potentially get you a nice tax break. Dealer trade-ins are typically quicker and easier than selling a car privately, but it’s important to know your car’s value before you begin negotiations.

Here’s how trading in a car works and some tips for getting the best deal.

How does trading in a car work?

With a car trade-in, a dealership makes an offer on your existing car and then applies the credit toward a new or used vehicle, which helps you borrow less for a new auto loan.

Trading in a car at a dealership usually saves time and effort, helping you hit the road faster with your new wheels. However, you might earn more cash by selling a car privately. If you simply want to trade in a car — not purchase a new one — you can work directly with a business like CarMax, which offers to buy consumers’ vehicles without requiring them to purchase a car in return.

6 steps to trading in a car

1. Determine your car’s trade-in value

Use an online car-pricing guide to determine your car’s value before hitting the dealership to keep negotiations in your favor. You’ll need to know your car’s year, make, model, mileage and overall condition to get the most accurate estimates. The Kelley Blue Book (KBB) condition quiz can help fine-tune your trade-in details and give you an idea of a more accurate trade-in value. Just keep in mind, KBB says that only 3% of trade-in vehicles qualify as “excellent condition.”

Here are three popular industry guides to use for a free vehicle appraisal:

• Kelley Blue Book: Car values trend lower since they look at the car’s condition, popularity and local market trends.
• Edmunds: Great for accessing data about local car sales and calculating the total cost of owning a car.
• NADAguides: Prices tend to be higher because they don’t take into consideration the condition of the vehicle. NADAguides assumes that most cars are in good condition.

If the three guides show vastly different values, take the highest one to the dealership to negotiate for the best trade-in offer. You can try holding out for the minimum trade-in value for your car unless it was in a major accident or has a salvage title. However, since many dealers use what’s known as the Black Book Value to appraise trade-in vehicles, your final offer might end up being lower than what the more popular industry guides quoted.

Understanding your car's price and value

• Wholesale price or value: This is the price dealers pay when purchasing used vehicles at auctions. The wholesale amount is adjusted based on the vehicle’s condition, age and KBB value and is typically lower than the other trade-in values.
• Trade-in value or price: The dealer will offer a trade-in amount based on industry guidelines, the vehicle’s condition and the level of demand in your area. Typically, trade-in values are slightly less than wholesale prices.
• Private sale price or value: You can expect to earn more for your car through a private sale. You can do this by selling your vehicle on Craigslist or other platforms. However, this method usually takes more time and effort.
• Retail price or value: The retail price, also called the manufacturer’s suggested retail price (MSRP), is the dealership’s full price for a brand-new car. You can usually negotiate a lower price for a brand-new car when trading in your existing vehicle.

2. Find out how much you owe on your car

If you have a clear car title with no liens, you’re all set to head to the dealership to explore your trade-in options. Otherwise, contact your auto lender to see if you can pay off your car loan early — just watch out for any hefty prepayment penalties.

While you can usually sell or trade in a car with a loan, how you proceed depends on whether your car is valued above or below your loan balance. Here are two scenarios:

• Your car is worth more than what you owe: If your car has positive equity, you can use the difference as a down payment on your new vehicle, which could lower your monthly payments. For example, if you owe $10,000 on a car worth $15,000, you could apply the $5,000 credit toward purchasing your new car.
• Your car is worth less than what you owe: If your car has negative equity, you’ll need to cover the difference with a down payment or roll the existing balance into a new auto loan. For example, if you owe $25,000 on a car that’s worth $20,000, you could roll $5,000 into your new car loan, but there are things to consider, first. Here’s more on how to get out of an upside-down car loan.

Note that if you roll over part of your current balance to your new loan, your interest charges and monthly payment will increase.

3. Gather documents

Gathering essential documents in advance can help speed up the trade-in process. Here’s what you’ll likely need to bring to the dealership:

• Car title: The car title proves you own the vehicle and are authorized to transfer car ownership to the dealership. If you can’t find your title, contact your lender (if you still have a loan) or the local DMV. Note that while some states issue instant car titles, receiving a replacement title can take as many as 15 to 30 days.
• Car registration: Your car registration also proves ownership, regardless of loan status.
• Loan information: Bring the lender’s details, account number and remaining balance if you have a current car loan. If you want to finance your new car, check with the dealer about required car loan documents, such as proof of income, residency and insurance.
• Maintenance records: Any documents showing you’ve taken care of the car and that it deserves a higher price for being in good condition can help with trade-in negotiations.

Can you trade in a car without a title?

In most states, selling, trading or buying a car without a title is illegal. This is because the title contains the vehicle’s most vital details, such as its VIN, make, model and current owner(s). Without a title, the dealer can’t confirm you legally own the car and will likely need to delay the trade-in process.

However, there are some exceptions to this rule. For example, vehicles older than 15 years don’t need a car title when registered in Vermont. Check with your state’s laws and your dealership’s rules to see if there are any workarounds to trading in a car without a title. Otherwise, contact your local DMV to request a replacement title to ensure a quick and easy trade-in.

4. Shop around for trade-in quotes

Trade-in offers can vary based on what the dealer already has on their lot, the car’s condition and how confident the dealer is that your vehicle will sell. You could reduce dealer negotiations by getting a few trade-in quotes and car loan preapproval offers from competing dealers. Be sure to get all offers in writing, and watch out for common dealer fees.

Here are some places to go when shopping for trade-in offers:

• A different brand dealership: Take your car to a dealer that doesn’t usually sell your car’s brand. For example, a Nissan dealer might show more interest in your Ford, since it could help diversify their selection. In contrast, a Ford dealer might be overstocked with Fords and less likely to offer you a competitive price.
• A used-car-only dealership: Places like CarMax advertise free quotes for trade-ins, so stopping by could be a quick and easy way to get a written trade-in offer.
• Online services: You can either sell your car via a used-car-buying site or take the written offers to local dealerships to negotiate a fairer trade-in price. KBB Instant Cash Offer is a popular way to trade in a vehicle.

5. Negotiate offers

Since dealers typically start with low trade-in offers, it’s up to you to negotiate a better price. You shouldn’t accept any offers below the industry guides’ minimum value — if the dealer refuses to meet it, try another dealership.

Here are some things to know when negotiating your trade-in value at the dealership:

• Verify the dealer’s guide: If the dealer doesn’t accept your referenced trade-in value, ask which industry guide they use. Check the data on your phone to ensure their appraisal process is honest and transparent.
• Get the dealer to cover your remaining balance: If you’re upside down on your car loan, ask the dealer to cover the outstanding amount, even if it’s more than the car’s worth. You’ll never know what you could get until you ask.
• Confirm your new car’s price: Some dealers might try to thwart your negotiations by raising the cost of the new vehicle after agreeing on a reasonable trade-in price. Be sure to review the cost breakdown before signing on the dotted line.

6. Review and finalize your trade-in

Once you and the dealer agree on a trade-in value for your car, you can move forward with signing the official paperwork. Make sure you understand the trade-in value and new purchase costs, since you usually can’t return a car after signing. If you need financing, research the different types of auto loans to find an option that fits your criteria and budget.

Pros and cons of trading in your car

Is trading in your car a good idea?

Trading in a car at a dealership has many benefits. For starters, trade-ins require less time and effort than private sales, since the dealership handles everything — appraisal, repairs and required paperwork. In contrast, a private sale requires setting up appointments for strangers to test drive your vehicle, plus extra trips to the DMV.

Additionally, your trade-in offer might be high enough to pay off your existing loan while reducing the cost of a new car.

However, if you still owe a lot on your current car and want to reduce your monthly bill, you might be better off refinancing your car instead of trading it in.