Drive by an auto dealership these days and you’ll likely see bare pavement galore, a snapshot of bone-dry inventory wrought by microchip-starved production amid strong consumer demand. Automotive News reports the industry hit a record-low 33-day supply of new vehicles in April. Unsurprisingly, new-car incentives have dried up: J.D. Power projected in late May that incentives on the average new car amounted to just 7% off MSRP. That’s down from 15 consecutive months, ending summer 2020, of average discounts at or above 10%. That amounts to at least $1,200 more for a $40,000 vehicle bought now versus then.
Consumers appear resigned to the higher prices. Two in five in-market shoppers who responded to a Cars.com survey in May 2021 said they had difficulty finding the car they wanted, and 51% said they were willing to pay more to get it.
Fortunately, there’s a silver lining to the affordability storm clouds: more trade-in cash. Used-car listings on Cars.com reflect prices spiking 14% from January through April, and trade-in values are high. In late April 2021, we conducted online appraisals on two recently traded vehicles from Autmotiveng.ng long-term editorial fleet: a 2017 Chrysler Pacifica traded in December 2020 and a 2019 Genesis G70 dispatched a year prior. In both cases, current values exceeded what we’d originally received despite additional age and assumed mileage. In just four months, the Pacifica’s trade-in value had spiked nearly 30%.
Shoppers trading in a vehicle might find it worth thousands more than it was worth just a few months ago. That could provide a much-needed offset against what’s likely to be an elevated price for its replacement. It might also be the only relief you get — so it’s vital to maximize the offer. Want to get the most for your trade-in? Follow these tips.
You need not become an expert in the field, but it pays to know your way around sales tax on vehicle purchases in your state. Some states, like California, charge tax on the full price of the vehicle you’re buying, regardless of any trade-in allowance. Others, like Oregon, charge no tax at all. Most states land in a third bucket, allowing trade-in credit to offset the taxable amount of a vehicle purchase. (Forty-two such states function this way, according to a 2019 tally by the Nest, a personal-finance site.)
That means if you bought a $35,000 new car with a trade-in valued at $8,000, you’d owe sales tax on the net difference, or $27,000. In a state with 7% sales tax, that works out to $1,890. Some states limit how much a trade-in can offset the taxable difference: Illinois, for example, imposed a $10,000 cap beginning in 2020. That means if your trade-in was valued at $12,000, the Land of Lincoln would reduce the taxable amount on your purchase by only $10,000.
In any case, this stacks the cards in favor of trading your old car to the dealership that’s selling you the next one, as opposed to selling the car to a third party. Consider the situation above, where you want to buy a $35,000 14.5m new car with a trade-in worth $8,000 3.5m
The second scenario costs $560 more. In states where this plays out, your salesperson almost certainly knows the same math — and he or she may rightly point out that any trade-in valuation to counter your third-party offer need not be exactly equivalent to work out to the same net total. (Note that trade-in valuations aren’t a science; they can vary by hundreds or thousands from one dealership to the next because they’re part of the overall negotiation and may depend on whether the dealer already has anything like your car or thinks he or she can make money on it.) But you can still prompt as high an offer as possible. Even if the dealer insists on “matching” it at a few hundred dollars less, a higher number elevates whatever that match might be. Which brings us to the next step …
Now that you know your state’s tax laws, it’s time to get the best offer on your vehicle. Check out Automotiveng.ng used-car value tool to get an idea of what your vehicle is worth, and consider where you want to collect offers. (It bears mentioning that if you’re willing to go through the trouble, you’ll almost certainly get the most money by selling your car to a private party — likely more than enough to offset the additional sales taxes in the second scenario above.)
Assuming you want to dispatch Old Faithful with the least hassle, prep your car for sale to a dealership and hit up an established group like CarMax, which can furnish a cash offer that’s good for a week. You should also visit at least one dealership from your car’s particular brand to secure a cash offer; just make sure they know you don’t intend to buy another car in the process. If your car is in decent condition and less than 5 or 6 years old, that dealer may furnish a more attractive offer because it can easily sell your car as a certified pre-owned vehicle. If it’s the same dealer that serviced your car, you might get a better offer still, as its service staff should have a thorough knowledge of the vehicle.
Once you have two or more offers in writing, keep the highest one in your back pocket as negotiating leverage.
With offers on your old car in hand, go about shopping for your next vehicle. There’s no need to whip out the offers as soon as your salesperson asks if you plan to trade anything in. Let the dealership conduct its own appraisal and originate an offer on its own; the new offer might very well exceed your third-party offer with no comparisons needed. If it falls short, it’s time to leverage your highest third-party offer, realizing that the dealership may “match” it a few hundred dollars short in states that allow trade-in allowances to offset the taxable total. (If you’re in a California- or Oregon-type situation, such adjustments won’t apply.)
Regardless of specifics, a high third-party offer should prompt a competitive match from the dealer selling you the next car. If it doesn’t, return to the party that offered more, jettison your old car and grab a ride back to the dealership selling you the next one. Depending on the difference, a couple extra hours and an Uber ride is probably worth your trouble.
Throughout the whole process, it’s critical to remember that the trade-in allowance is simply a factor that lowers your next vehicle’s net price. That out-the-door total, including all taxes and fees, should remain your primary focus.
Current inventory shortages mean you’ll probably see little movement on the listed price for whatever new, or newer used, car that you’re eyeing. Getting the highest trade-in value is a way to reduce what you’ll eventually owe as much as possible, and it might be the only leverage you’ll have in today’s environment. But it all wraps into the net difference, which matters most — so much so that we negotiate exclusively on it for Automotiveng long-term editorial purchases.
Recall the scenarios laid out in Step 1 on a $35,000 | 14.5m new car with a trade-in worth $8,000. With various assumed taxes and fees, the prospective out-the-door total netted to $29,390 | 12.3m in the first scenario. That number (not the $35,000, the $8,000 3.5m or any monthly payment amounts) should be the focus of your negotiations. Trade-in values are part of the equation, and perhaps the most important part right now.