Gearing up to buy a new car is an exciting prospect that, for two-thirds of Americans, comes along at least once every five years. Put another way, the average U.S. citizen owns 9.4 new cars during their lifetime. However, the process can also be stressful. For example, what happens to your existing vehicle, assuming that you're not handing it down to a family member or keeping it around as a spare?
The obvious choice is to trade-in your old car to the dealership where you're purchasing your new car. In that way, your trade's value will (hopefully) reduce the expenditure on the new car. Besides being convenient, trading-in your old car to the new car dealership also presents a sales tax advantage in most states. That said, new car dealerships realize that they're dealing with a captive audience, so the price paid for your old ride may be less than what it's worth in a private party sale to an individual. However, the private sale process does require more effort.
To further complicate the decision over whether to trade-in your old car or sell it yourself, there's actually a third option: selling to a dealership other than the one where you're buying your new car. That's a lot of information to digest, so let's look at the pluses and minuses in detail.
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Obviously, trading-in your old car at the dealership where your new car — or "new to you" used car — is purchased is a popular method to dispose of your old ride. It's a seamless transaction in the sense that you'll arrive in your old car and leave in the new one. If the loan balance on your old ride is more than the vehicle is worth — called being upside down or underwater — the dealership may be able to roll that negative equity into your new car loan.
Additionally, there's no need to take photos of your old car, place advertisements, and deal with the communication, meet-ups, or other possibly bad experiences that accompany a private party sale. By trading-in your old ride, all of the paperwork is handled for you and the trade-in vehicle doesn't need to be in perfect condition, either. Dealerships have detailing personnel and relationships with mobile body shops that will make short work of those small dents, dings, scratches, and stains that you've been meaning to address.
But perhaps the biggest lure to trading-in is the sales tax credit. In most states, you'll only pay sales tax on the purchase price of your new vehicle minus the trade-in value of your old car. For instance, if a new car costs $50,000, and you receive $20,000 for your trade-in, you'll only owe sales tax on the $30,000 difference. At a sales tax rate of 8%, that sales tax savings represents a $1,600 value in our example.
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Like we mentioned earlier, dealerships know how attractive and convenient it is to trade-in your vehicle, so their trade-in offer is often not the most generous — not to mention they want to sell it for a profit. To capture top dollar, the option always exists to sell your old car to another driver directly in what's called a private party transaction — or "peer to peer" to use the parlance of our times. The buyers you'll be dealing with at retail level may not be as forgiving of cosmetic blemishes or deferred maintenance, so expect to spend some money and elbow grease getting your old car in tip-top shape prior to sale.
Then, there's the process of taking quality photos, creating advertisements, and communicating with potential buyers — some of whom are guaranteed to be a waste of time or worse, scammers. Once a buyer is found, the work doesn't stop there. You'll need to pay off your loan, if applicable, and transfer the title. This may require the cooperation and trust of the buyer, not to mention a trip or two to the DMV or your local bank branch.
The reward for enduring this level of hassle is more money in your pocket. Dealerships often expect to earn large profit margins on customer trade-ins when they're resold. By selling direct to an end-user buyer, you'll capture some of this "profit" for yourself in the form of a higher sales price. That said, it must be considered how the sales tax savings from trading-in stacks up against the extra proceeds from a private party sale. For example, getting $3,000 more for your old car from a private buyer is obviously better than a $1,600 sales tax savings. But whether that scenario is actually realistic is something you'll need to determine.
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Lastly, an option exists to sort of split the difference between trading-in and selling to an individual: selling your vehicle to a dealership other than the one where you're purchasing your new car. In minutes, you can obtain online quotes from buyers like Carvana and CarMax. Similar to trading-in, these buyers will accept your vehicle even if it has some cosmetic flaws or mechanical issues, but do be sure to disclose such shortcomings during the appraisal process. An honest assessment of condition will avoid last-minute price adjustments when the deal actually goes down. Also, don't, like, crash into the CarMax building.
For varying reasons, Carvana and CarMax — which only sell used cars — are known to be more generous with their offers than many franchised new car dealerships. Some experts reason that because both companies are publicly traded, there's a constant pressure to show investors that business and market share are growing. Selling your car to a different dealership than the one where you're purchasing your new car is doubtlessly easier than selling to a private party. It's less time-consuming, and logistics like title work and loan payoffs are handled effortlessly on your behalf.
That said, it's still a separate transaction to the new car purchase and therefore, not subject to the ever-important sales tax savings. Plus, if there's negative equity in your trade, you'll need to pony up some cash instead of rolling the shortfall into a new car loan. At the very least, it's worth getting a valuation from stores like Carvana and CarMax as a benchmark to judge subsequent trade-in offers.
