You've decided to buy a new car.
The natural question is what to do with your current car. You've
got a couple options, so you need to understand the relative
value of selling a used car versus trading it in when you buy.
The good news is that
understanding the trade-in math can help put a nice chunk of
change in your pocket. The bad news is that the math is not
quite as straightforward as you might think.
Let's say you have a car that
you can sell for privately for $5,000. And let's say you're in
the market for a $25,000 new car. Should you sell your car
yourself, or should you trade it in when you buy the new one?
You might put more cash in your
pocket by selling it yourself, but your net gain on the sale
might be lower than if you traded it in. That might sound
strange, but it's really not. The missing piece of the puzzle is
the impact of sales tax.
When you buy a new car, you
have to pay sales tax only on the difference between the
purchase price of the car and the trade-in amount.
So if you can find a dealer who
will give you $10,000 for your trade-in (and he very well might
in order to move a car off of his lot), you'll owe tax on
$15,000. If the tax rate is six percent, that's $900. Consider
that savings when you're deciding whether to sell your used car
on your own.
If you sold your car on your
own, you'd have to sell it for $10,000 plus $900 (your tax
savings) to equal what your dealer was going to give you. That's
a pretty high hurdle.
But that's really only one
consideration.
The other big thing to consider
is the hassle of selling on your own, or to look at the other
side of the coin, the convenience of letting your dealer handle
the entire transaction.
If you sell on your own, you
have to advertise the vehicle and try to market it in your area.
Do you know the right price to charge? What sells where you are,
and what does not? You'll also have to show it to interested
parties, wait while people let their mechanic look at it, and so
on. You'll have to handle all of the paperwork yourself,
transfer the title appropriately and meet any requirements your
state has for people who sell vehicles.
If you trade in your car,
you're pretty much selling your car to the dealer. He does all
the paperwork, and he's very likely to offer you more for the
car than you'd get from a private buyer. You could have the
entire transaction done the day you buy your new car, and never
have to deal with another headache.
Selling your own used car and
trading it in are both good strategies, and you can make out
pretty well with either. But before jump into the seller pool,
consider very carefully whether it's worth the bother, or
whether trading will net you more money.
