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Tero Vesalainen/Getty Images If you choose to sell your car to another dealer or third party, you may have to drive to multiple locations to complete the transaction. You must also negotiate a complete separation of the price at which the car is sold and the purchase price of the new car. Of course, savvy buyers know it's a good idea to separate the prices, so you know you can get a lot of discounts on both new and used car trading.
They will pay off your existing loan You can trade even if you still owe on your used car trading loan. In practice, dealers often take care of consumers' old money. They will pay off the remaining loan balance when you trade in the old and take ownership of the car directly from the lender. If you own any positive assets of the vehicle, it will be used as an advance on your new lease or purchase.
If your net worth is negative, you can even trade the vehicle to a dealer. Negative equity means that you owe more than the value of the model. It's not the best way to deal with an underwater car loan, but it's easy. We will discuss later in this article why, for many buyers, trading current instruments for negative equity is not the ideal option.
The dealer is responsible for the paperwork Selling cars involves a lot of paperwork. Things can get more complicated if you sell your car in a different state than when you registered it, or if you live in a different state. However, if you trade a used car tradingat a dealer, they will handle the paperwork for you. They know which files need to be filed with which DMV. All you need to do is sign the document, but you will pay for the document.
You can save business tax A major benefit of buying and selling cars at dealerships is the sales tax savings. In many states, it is possible to deduct the trade-in price from the price of a new car.
Let's illustrate this point with an example. For simplicity's sake, let's assume that you don't have any negative equity or otherwise owe money on your car. You want to buy a brand new car and have agreed on a price of $30,000. You also have used cars to trade. The dealer will provide $10,000 for your trade-in, which means your net payment will be $20,000. In many states, you'll pay $20,000 in sales tax for this, not $30,000 for the total value of the new car.
It's important to do the math to determine whether the sales tax you save by making a transaction on your car is greater than the sales tax you would earn by selling yourself.
Why not trade in old for new? After considering the advantages of trading your car into a dealership where you are buying your next car, let's look at some of the disadvantages. It's convenient to trade your car to a dealer, but it's not always the best way to get the most value from a used car. If you sell your used car tradingto a private party or other dealership, you might make more money.
You don't get the highest dollar When you buy or sell a car at a dealer ship, you may only be given the wholesale price of the car, which may be significantly lower than what you would get if you sold it to a private party. If you want to get the most out of a used car tradingand are confident in your ability to sell it, you should sell it yourself. See our Car Sales Guide for advice on how to prepare, sell and close a used car sale.
Depending on the age, class, condition, and mileage of the vehicle, the difference between the wholesale price and the private resale price can range from a few hundred to a few thousand dollars. If it's only a few hundred dollars, it may not be worth the time and trouble to sell yourself.
This added to the confusion of the transaction Every car deal has three key parts: the price of the car, the trade-in subsidy and the terms of the car loan or lease. In most cases, the salesperson will want to mix them into a package and sell them to you for a monthly car payment. It's a great way to sell a car, but it can be confusing for buyers.
Solid Color/Getty Images As the buyer, you want to make these components as different as possible. By adding a trade-in to the same transaction as buying a new car, dealers can make the vehicle's price look outrageous. They do this by undervaluing your trade-in. In addition, they can offer higher prices to consumers by marking the price of a new car or financing. With so many numbers floating around, it is difficult to estimate the true value of the trade-in offer.
The easiest way to keep negotiations with car salespeople focused on the new car price is to sell the used car trading yourself and get pre-approval for financing before you start shopping.
If you are seriously underwater in the vehicle When your vehicle is owed more than it is worth, you will have negative equity, an inverted loan, or an underwater situation. In this case, it makes little financial sense to trade vehicles at the dealership. If you can't sell your current car and use the money to pay off an existing loan, the cash must come from somewhere else.
As an example: Suppose you owe the car dealer $15,000, and the dealer only pays you $12,000, you owe the dealer $15,000. If you sell, that means you will immediately pay the lender $3,000. If you have enough cash to make the loan payments, that's fine.
But if your budget is tight, your options are more limited. Many car dealers and lenders will be happy to "help" you by adding an existing balance of $3,000 to your new car loan. The lender will use the extra cash to pay off the loan on your old car. Unfortunately, this is a financially dangerous way to buy a new car. With rare exceptions, you may even start a new car loan with negative equity before you leave the auction house.
Smolaw11 / Getty Images In essence, you will be paying for two cars, and you can only drive one of them. Since your new car will quickly lose value as it drives off the lot, this will force you to invert your car loan even underwater.
Extending from the previous example, we say that your new car is worth $20,000. Add the $3,000 from the old loan, and your financing balance is $23,000. Next, suppose a new car loses 10% of its value as soon as you take it out of the lot, in which case it's $2,000 (on average, it could be higher). Before you get your new car home, you'll owe $5,000 more than you're worth. In other words, you would have $5,000 in negative equity.
If you aggregate your car, or if it is stolen while you are in negative equity, you are still liable to repay the lender the full balance of the loan. Even if you have gap insurance to cover the amount you're underwater, many policies won't cover the balance of your previous car loan. Any H's in your life that can cause you to fall behind on your payments or underwater car loans can quickly show up on your credit report and damage your credit score. Buying a car with poor credit leads to higher interest rates and stricter lending conditions.
If you have an inverted car loan but want a new car, it's better to sell your old car rather than trade it in. This means you can maximize the amount of money you get from the buyer and want to use the sale to get close to your old loan balance.
Another option is to delay the purchase of a new or used car tradinguntil you have paid off enough of your existing loan and are no longer underwater. Our guide to inverted car loans is a good resource to help you with the details.
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