New car shoppers face a common dilemma: should they trade in their existing car at the dealership or sell it to a private buyer? There are pros and cons to both approaches. Learn more about them to help you decide which option is the best one for you.
One of the advantages of trading in your car is that the dealership will accept it in any condition. “They don’t care about dents, dings, rust, rips or stains in the upholstery,” says J.D. Power’s Jeff Youngs. “Even if the car doesn’t run, you can have it towed in as a trade.”
Trading in is thus the easiest and most convenient option. Just take your old car to the dealer and they’ll make you an offer. That offer can go straight toward buying your next car. You don’t even have to handle any paperwork, as the dealer will take care of that too. It’s as simple as driving in with your old car and driving out with a new one.
The downside of trading in is that you may not get as much money as you could be able to get by selling privately. “Since the dealer still needs to make money on the car, they won’t give you retail value for it,” Autotrader explains. At best, you should expect to get the vehicle’s wholesale value.
That being said, there is a tax advantage that helps reduce the price gap between trading in and selling privately. Autotrader says that most states charge sales tax only on the difference between the new-car price and the trade-in value. For example, if you buy a new $20,000 car at the dealership while trading your old car valued at $8,000, most states will only tax you for the $12,000 difference.
The main advantage of selling privately is the potential for greater monetary gain. “You’ll usually get the most money for your car, somewhere between the vehicle’s retail and wholesale values,” says Consumer Reports. If your old car is a popular model in good condition with low mileage and features that shoppers want, you may even be able to sell it quickly.
However, there are a number of disadvantages to selling your car yourself. You need to make listings, place ads, take phone calls, make time out of your schedule to meet potential buyers and give test drives, and do a lot of haggling with strangers. You also need to deal with financial institutions on your own.
Additionally, the timing has to be right. “Selling a car privately can take weeks. It can take months if the car is not in demand,” Youngs writes. “During that time, you will have to invest in advertising and keep the car clean as potential buyers will call to see the car on a moment’s notice.”
If you cannot sell your old car quickly, you’ll either have to wait to buy a new car or be unable to use the money as a down payment. If the car isn’t paid off, you could even have an overlap of car payments. And then there’s the tax issue.
Taxes and the bottom line
Going back to the trade-in example, if you managed to sell your old car for $10,000, you would be up $2,000 on the trade-in value but would still need to pay tax (in most states) for the full $20,000 on the new car. That extra tax and all of the legwork required to get that $2,000 out of a private buyer may not be worth it to you, depending on how much you value your time. And, depending on the vehicle, that $2,000 value used in this example may be very generous — you could be looking at a gain of only a few hundred dollars.
And that’s not the last of the potential downsides: “If you sell your car for more than you paid for it, the Internal Revenue Service considers that a capital gain, which is taxable,” says Elvis Picard, an investment manager and contributor for Investopedia.
Ultimately, trading in your vehicle is the simplest and most convenient option, and one that, depending on your vehicle and salesmanship, doesn’t necessarily come at a great cost. If you do choose to sell privately, work closely with a trusted financial institution to avoid getting scammed.