The usual practice is to trade in your old car for a higher-priced automobile, meaning you will have to pay cash or finance the difference in cost. While it is possible to trade in your current car for a cheaper one, you may suffer a slightly greater than usual financial penalty for this transaction.
Typical Trade-in
In a typical trade-in, you will walk into the dealership with your used car and have it inspected to assess its value. The dealer will tell you whether he will accept a trade-in based on the marketability and the condition of your vehicle. If the dealer agrees to a trade, you can then view the vehicles on the lot to narrow your choices down to a few or a single one to begin negotiations. During these negotiations, the dealer will usually quote you a net price only. In other words, you will be told how much you would need to pay for the car you are buying, in addition to giving your old car to the dealer. Dealers are usually reluctant to provide a breakdown, detailing the price of the vehicle on the lot, the value assigned to your used car and the difference between them, which is what you will owe. They instead will tell you only the last, net figure.
Advantages
The advantages of trading in your car are two-fold. First, you will not have to spend time selling your existing car and then purchase another vehicle in a separate transaction. This saves time and ensures that you won't be without transportation. There is also a tax advantage. If you were to sell your existing car for $4,000 and purchase a new car for $8,000, you would pay taxes on the $8,000. If, however, you trade in your car and purchase the same new vehicle for $4,000 you will only pay sales tax on the $4,000 purchase.
Downgrading
Most dealer will allow you to trade in an expensive car to buy a cheaper vehicle. However, when you trade in a car, you will usually get a smaller deduction in the price of the new vehicle than the fair market cash value of your used car. If you could have sold your existing vehicle for $10,000 to a private party, expect to receive $9,000 or less off of your new purchase when you trade it in. If you are trading in a vehicle costing only $1,500 a 10 percent hit will amount to only $150. When trading in a $10,000 vehicle, however, the same percentage loss amounts to $1,000.
Unpaid Vehicles
Keep in mind that if your existing car is not fully paid for, trading it in may increase the amount yo owe instead of reducing the bill. Let's say you still owe $3,000 on your existing vehicle and trade-it in to purchase a car that had a sticker price of $8,000. Do not be surprised if the dealer crunches the numbers only to tell you that you now owe $9,000. If you have recently purchased your vehicle and most of the original car loan is still unpaid, your car may be worth less than what you owe on it. This is called being "upside down" on your loan.
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