When buying a car, is it better to have a trade in or a down payment?

By Investopedia Staff AAA
A:

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 likely to offer an even lower price if the trade in is from a car manufacturer that is different from the one the dealership represents.

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 and advertising the sale, to making the car available for test drives and ensuring the full sale proceeds are received 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.

When comparing a trade in to a private sale, then, it boils down to how much the convenience factor is worth. Receiving a couple 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.

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 good 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.

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 lowball offer.

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