When buying a car, it may be better to have a down payment rather than a trade-in. A trade-in offers convenience to the car buyer, since one can walk into a dealership with a used vehicle and walk out — or rather, drive out — with a brand-new automobile. But this convenience comes at a significant cost since most buyers are likely to leave cash on the table by receiving less for their trade-in than what it is worth. The dealer is especially likely to offer a low price if the trade-in is an unpopular vehicle, in bad condition, or undesirable for another reason.
Key Takeaways
- When considering whether to make a down payment or trade-in a vehicle it’s usually best to make a down payment from a financial perspective.
- You’ll get more bang-for-your-buck when offering a down payment. This could mean selling your vehicle privately before going in for a purchase.
- However, the difference of a few hundred dollars might not make the private sale worth the hassle.
The preferred course of action would be to sell the car privately before buying a replacement vehicle and using the sale proceeds as a down payment. But arranging for a private sale can be a time-consuming and cumbersome process involving a number of steps. These include:
- Ensuring that the vehicle is sale-worthy
- Advertising the sale
- Making the car available for test drives
- Actually getting the money once the car is sold
The timing also has to be near-perfect in a private sale, in order to avoid being without an automobile for an inordinately long time. You also have the potential hassle of signing over the title, which must be notarized in some states. As well, if you sell your car for more than you paid for it, the Internal Revenue Service (IRS) considers that a capital gain, which is taxable.
Regardless of whether the old car is being traded-in or sold privately, the seller should have a good idea of what the vehicle is actually worth before coming up with a price for it. Over-inflated expectations of the value of the car may result in reasonable offers being turned down, while inaccurately low estimates will hurt the seller's pocketbook. A number of online sites provide estimates for both trade-ins and private sales. Conversely, if you're open to financing your car purchase with a loan, an online auto loan calculator can help illustrate how much a down payment will affect your monthly payment.
The Bottom Line
When comparing a trade-in to a private sale, it boils down to how much the convenience factor is worth. Receiving a couple of hundred dollars less for a trade-in, as opposed to a private sale, may be well worth the hassle involved in the latter, for most people.
In the end, it may be best to arrange a down payment rather than a trade-in when buying a car. But if that is not possible and a trade-in is the only option, do your research beforehand to obtain an estimate of the value of your vehicle. A few hours of research can save you hundreds — if not thousands — of dollars, by fetching you a better price for your trade-in than a dealer's low-ball offer.
