Tuesday, May 8, 2012

The trade-offs of a trade-in

When a car owner decides to buy a new auto, they usually wish to sell their current model.  They can do a private transaction, which requires some effort, patience and risk, or they can trade it in at a dealership. A trade-in occurs when a car owner sells their existing model to the dealership as part of a deal to buy another car (new or used).
The advantages of a trade-in (versus a private sale) are the efficiency and ease of buying and selling at the same location, as well as significant tax savings.  The disadvantage is getting a lower price for the trade-in vehicle than you’d get in a private sale.  Let’s look at the trade-offs in more detail.

Since even dealers of used cars usually want your trade-in, they tend to make the deal as painless as possible. Trading in a car is usually a same-day affair, with a minimum of procedures.  The dealer assesses your car’s condition, its age and other factors, and then sets its trade-in value.

The emphasis is on convenience.  Unlike a private transaction, you don’t have to place ads, arrange test drives or face legal repercussions if the car breaks down soon after the new owner drives away in it.  (Once a car is traded in at the dealer, it's their responsibility to handle the resale.)

Then there are the potential tax savings. Since the trade-in’s value is deducted from the selling price of the car you’re acquiring, this lowers the tax that you’ll have to pay on the new car.  For example, if you buy a new car worth $40,000, and your trade-in is valued at $20,000, this effectively lowers the new vehicle’s selling price to $20,000.  Instead of paying HST of $5,200, you would pay $2,600—a saving of $2,600.

The downside is that most dealerships will offer less than your car is worth. The dealer incurs costs in cleaning the car and fixing any problems and still must be able to sell it at a profit. So you should expect a low offer.  If the offer for your used model sounds too good to be true, it probably is: the dealer is likely making up for it in the negotiated price of your new car.
However, knowing the true market value of your trade-in vehicle will give you a stronger hand when negotiating.  It pays to study the market in order to get a realistic idea of your existing car’s value. Canadian Black Book (canadianblackbook.com) is considered the industry Bible for providing market values for cars, trucks and SUVs at the wholesale level.
Also, find out the current market demand for your make and model, and whether the dealership is oversupplied with that model. How much the dealership is willing to offer for your trade-in depends on supply and demand.

Assemble all your car’s service records. If you can demonstrate that you’ve looked after your car with recommended maintenance, it will fetch a higher trade-in price (whether at a dealership or privately).  Whichever route you go, it’s important to weigh the trade-offs when considering how to sell your current vehicle and buy another. 
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