How does trading in a car work?

By the Mercury Team

Thinking about upgrading your car? Trading it in at a dealership is one of the easiest ways to make the switch without the hassle of selling it yourself. But how does it work? In this article, we’ll break down the process and provide you with tips and considerations for your car insurance.

How Does Trading in a Car Work?

Trading in your car is a straightforward process, but knowing what to expect can help you get the best deal. Here’s how it works:

Valuation and Inspection

When you bring your car to a dealership, they’ll check it out inside and out. They’ll look at the mileage, condition, and any wear and tear (e.g., scratches, dents, or interior stains). The market demand for your car’s make and model also plays a role in the offer you’ll get. If your car is in high demand, you might get a better deal. Before you go in, it’s smart to check its value using tools like Kelley Blue Book or Edmunds so you have an idea of what’s fair.

Negotiation

Once the dealership gives you an initial trade-in offer, you don’t have to accept it right away. Negotiating can help you get a better deal. It’s a good idea to get trade-in quotes from multiple dealerships to compare. Also, keep your trade-in value and the price of your new car separate during negotiations so you know exactly what you’re getting for each.

Finalizing the Deal

When you’re happy with the offer, you’ll sign the paperwork to transfer ownership. If you still owe money on your car, the dealership will handle the loan payoff. Before driving off in your new car, don’t forget to update your car insurance to make sure you’re covered.

How to Trade in Your Car

If you’re ready to trade in your car, here are some of the preliminary actions you need to take:

Research Your Car’s Value

Before heading to the dealership, check how much your car is worth using tools like Kelley Blue Book or Edmunds. These sites give you an estimate based on your car’s make, model, year, mileage, and condition. Getting multiple quotes will help you negotiate with confidence.

• Insurance tip: If your car’s value has significantly decreased, you might be paying for insurance coverage that exceeds its worth. Consider adjusting your coverage before trading in.

Prepare the Car

A little effort can go a long way. Give your car a good wash, vacuum the interior, and fix small issues like scratches or worn-out wipers. Also, gather maintenance records because showing regular upkeep can boost your trade-in value.

Compare Offers

Don’t settle for the first offer. Get trade-in quotes from multiple dealerships or use online services like CarMax, Carvana, or AutoTrader to compare values. Some dealerships will match or even beat a competitor’s offer.

Review the New Car’s Price Separately

When negotiating, keep your trade-in and new car purchase separate. Dealerships sometimes mix the numbers to make the trade-in seem better than it is. Knowing the value of both your car and the one you want will help you get the best overall deal.

• Insurance tip: Different vehicles come with different insurance rates. Before committing to a new car, compare insurance quotes to make sure it fits your budget.

What Paperwork Do I Need to Trade in My Car?

Having the right paperwork ready can make the trade-in process much smoother. Here’s what you’ll need:

• Title and registration: Your car’s title (a.k.a. "pink slip") proves that you own the vehicle. You’ll also need your current registration to show that the car is legally allowed on the road.
• Loan or lease documents: If you’re still making payments on your car, bring your loan or lease paperwork. The dealership will contact your lender to figure out the payoff amount or lease return details.
• Maintenance records: While not always required, service records can help boost your trade-in value.
• Driver’s license and proof of insurance: A valid driver’s license confirms your identity, and proof of insurance is usually required when finalizing the deal.

Car Dealership Trade-In: What to Expect

Once you arrive, the dealership will appraise your car. This usually involves a quick inspection, possibly a short test drive, and checking things like mileage, condition, and market demand. They’ll also compare your car to similar vehicles in their inventory to determine a trade-in offer. The whole process typically takes 30 minutes to an hour.

When it comes to negotiating, dealerships may use strategies like "checking with the manager" to make it seem like they’re offering you the best deal. To get the most for your trade-in, come prepared with quotes from multiple dealerships and online valuation tools like Kelley Blue Book or Edmunds. Don’t be afraid to push for a better offer!

It’s also important to note that your car’s trade-in value can fluctuate based on the time of year and market demand. SUVs and trucks tend to get better offers in the fall and winter, while sedans may be worth more in the spring and summer. If used car prices are high, you could get a better deal on your trade-in.

• Insurance tip: Before driving off with your new car, make sure your insurance is updated. Some dealerships may even help with the coverage transition, so ask about your options.

How Do Car Trade-Ins Work If You Still Owe Money?

Trading in a car while you still owe money on it is doable, but you need to understand how it affects your deal. Here’s what to know:

Negative vs. Positive Equity

Your car has positive equity if it’s worth more than what you owe. In this case, the extra value goes toward your next car purchase, which is great! However, if you have negative equity (also called being “upside-down” on your loan), you owe more than the car is worth. This means you’ll either have to pay the difference or roll it into your new loan.

Payoff Amount

Before heading to the dealership, check with your lender to get your payoff amount—i.e., how much you still owe on your car. If you trade it in, the dealership will typically pay off the loan directly, but you’ll want to double-check that everything is settled.

Rolling Over the Difference

If you’re upside-down on your loan, the dealership might let you roll the remaining balance into your new loan. While this can be convenient, it also means you’ll be paying off both the old debt and the new car at the same time, which could lead to higher monthly payments. Always run the numbers to make sure it’s the right move for you.

Is It a Good Idea to Trade in My Car?

Trading in your car can be a great option, but it’s not always the best financial move. Here’s a look at the pros and cons to help you decide.

Pros

The biggest perk of trading in your car is convenience. Instead of dealing with private buyers, advertising, and negotiating, you can hand your car over to the dealership and be done with it. Plus, in many states, the trade-in amount is deducted from your new car’s purchase price, lowering your sales tax.

Cons

The downside? You probably won’t get as much money for your car as you would if you sold it privately. Dealerships need to make a profit when they resell it, so they often offer less than the car’s full market value. Also, trade-in negotiations can be tricky—dealerships may bundle numbers together, making it harder to see what you’re actually getting.

Situational Factors

Your car’s age, condition, and market demand also play a big role. If you have a popular model in good shape, you’ll likely get a better offer. If your car is older or has high mileage, a private sale might be worth considering.

• Insurance tip: Upgrading to a newer, safer vehicle could lower your insurance rates. On the other hand, trading for a high-performance car might mean higher premiums, so check with your insurer before making a final decision.

Is It Smart to Trade in a Car That Isn’t Paid Off?

If your car is worth more than what you owe (positive equity), you can use the extra value toward your next car. But if you owe more than it’s worth (negative equity), you’ll either need to pay the difference or roll it into a new loan, which can increase your monthly payments.

If you have negative equity, selling your car privately could get you a better price than a trade-in. You could also keep making payments until you have positive equity, which will give you more negotiating power in the future.

It’s also important to remember that cars lose value quickly, especially in the first year. If you just bought your car, waiting until you’ve paid down more of the loan or until market conditions improve could save you money. On the flip side, if used car prices are high, it might be a good time to trade in.

Auto Insurance Considerations

If you’re trading in your car, don’t forget about your insurance. Making sure your new car is covered right away will keep you protected and might even save you some money. Here’s what to keep in mind:

Transferring Coverage

Many insurance policies automatically cover your new car for a short grace period (typically 7-30 days), but the exact time frame varies by provider. Check with your insurer to make sure you don’t run into any gaps in coverage.

Notifying Your Insurer

Call your insurance company as soon as possible to let them know about the trade-in. This ensures that your new vehicle is fully covered and that you’re not paying for insurance on a car you no longer own.

Updating Coverage Levels

Your new car’s value will affect your coverage needs. If you’re upgrading to a pricier vehicle, you may want to adjust your collision protection and comprehensive coverage. If you’re switching to an older car, you might not need as much coverage as before.

Potential Rate Changes

Insurance rates can go up or down depending on the car you buy. Newer models with advanced safety features may qualify for lower premiums, while high-performance or luxury vehicles can cost more to insure.

Bundling and Discounts

Ask your provider about possible auto insurance discounts. You might save money by bundling your car insurance with homeowners or renters insurance, insuring multiple vehicles, or driving a car with safety and anti-theft features.

Ask the Insurance Expert

Q: If I trade in my car while it’s still under a loan, what steps should I take to ensure my insurance coverage transfers smoothly and that I’m fully protected on the new vehicle?

A: “First things first, call your insurance company. Most policies give you a short grace period where your new car is covered, but it’s always best to confirm. If you’re financing the new car, your lender will probably want you to have full coverage with comprehensive and collision, so make sure your policy meets those. And be sure to have details about your new car—VIN, make, model, year, etc.—ready to go so your insurer can assess your coverage needs properly. Also, don’t forget to confirm with the dealership that they’re handling your loan payoff.”

- Kevin Quinn, VP, Auto Claims

Conclusion

Trading in your car is a simple way to upgrade, but doing a little homework can help you get the best deal. Know your car’s value, have your paperwork ready, and negotiate your trade-in separately from your new car purchase.

If you’re looking for cheap car insurance for your new vehicle, Mercury can customize a policy that fits your needs and budget.

Contact us today for a fast, free quote!