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How Dealers Value Your Trade

Getting rid of your old car is one of the oft forgotten pain points of buying a new car.

Getting rid of your old car is one of the oft forgotten pain points of buying a new car.  Most people essentially have two options, either they can sell their car privately or they can trade it in to the dealership. The problem with how dealers value trade-ins is the built in costs of the dealership. Many of us just want to offload our old cars as quickly as possible and the surefire way to do that is to simply trade it in – even if it means less cash in our pockets.

While almost all of us feel ripped off after we trade in our old cars, not all of us should.  This article explains how dealerships value trade-ins and why they do so in this manner so that you can better evaluate if you are getting a good or bad deal.  So let’s get into it.

Dealers buy cars at wholesale, including yours

Dealerships buy cars at wholesale and sell them at retail.  So whether you realize it or not, when you trade-in your car to the dealer you are actually selling it at wholesale.  It doesn’t make sense that a dealer will purchase your car for more than s/he can buy a car at a wholesale auction.

The wholesale prices aren’t fixed, though, and they fluctuate for the same basic supply/demand reasons that other prices change.  For example, when the 2011 tsunami derailed Japanese manufacturers’ production, the wholesale prices for used Japanese cars went up.

Unfortunately there is no way for you to go to a computer and look up what the current wholesale price is for your car without paying for and subscribing to a service.  Fortunately, with a little research, you can get a pretty good idea of what a fair trade-in value is for your car.

Determining a fair price

The first thing you need to do is look around the internet and find out what your car is selling for at different dealerships.  No two used cars are exactly alike, but you can get a pretty good idea of what the retail value of your car is by being honest about the mileage and condition of your car and comparing it to ones that are very similar.

Now that you have a good idea of what the retail sticker price is, you need to subtract out the wriggle room that dealers build into the sticker price.  Let’s say that the dealer is willing to knock off 3% on a used $15,000 car for someone who is willing to negotiate.  That means that the $15,000 car will actually sell for $14,550.

Generally speaking, dealers expect to make around $1,200 (plus/minus) when they sell a used car.  So subtract $1,200 from $14,550 and you get $13,350.

Hold on, we’re not done yet.

Most dealers will perform a comprehensive inspection to see if your car has any issues, repair anything that needs fixing, and thoroughly clean and detail your car (including a new paint job if necessary) before putting it on the lot. This is a critical part of how dealers value trade-ins.

Understanding how much this should actually cost is dependent on an honest assessment of your car’s condition.  If you are certain that all your car needs is an inspection and a little detail work, maybe you should only subtract out $1,000.  But if your car is like most on the road and could use minor repairs, benefit from a little paint here and there, and maybe a new set of tires, you should plan on subtracting out more – sometimes up to $4,000.

Let’s say your car is in average condition and it takes the dealer $2,000 worth of work before s/he will put it on the lot.  The cash you can now expect drops down to $11,350.

Dealers will often build in the cost of transportation (in case they want to resell it at wholesale to another dealer) and marketing.  New car transportation costs are around $700 and you can expect around the same cost for your used car.  The amount that dealers spend on marketing differs widely depending on where you are and what the dealer actually does to market his/her cars, but maybe $100 is reasonable.

That brings the cash amount you can expect for your car down to $10,550.

Dealers know that you need to get rid of your car and they love to negotiate, so you can expect their initial offer to be somewhere between 10%-20% lower than what they are actually willing to spend on your car.  If we split the difference and say that the dealer’s first offer will be 15% lower than s/he is actually willing to spend on your car, you can expect an initial offer of around $8,970.

Yikes!

$8,970?  Holy smokes that sounds like a terrible offer for a car that retails for $15,000!  And it is, but if you can negotiate the price up to the $10,500 range you probably have a fair deal on your hands even if it still feels like a rip off.

In the end it comes down to what is more important to you: time or money.  You could probably get a couple thousand more for your car if you sell it privately, but that takes time, energy, and resources.  If you don’t want to spend the time selling your car privately, you just need to expect that you will get a wholesale offer for your car.

And that’s how dealers value trade-ins. Sound stressful? We’re working on a way to compare those offers to get you the best trade-in offer. Check back soon for details.

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