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How Car Dealers Make Money When You Trade-In Your Car

By Mike Richards Posted: 10/02/2019

How do dealers make money when they trade-in your car? How can they make profits from this transaction? We explore how they do this.

What do you do with your current car when you want to replace it with another one? Do you sell it or trade it in at the dealership? Today, drivers in the US keep their cars longer than they did in the 90s. People who buy their vehicles new keep them for an average of six years. More than half of used car buyers prefer to trade in their cars over finding a buyer themselves.

Many dealerships encourage trade-ins, but how do they make money from this type of sale?

Lowering the Value of Your Car

Dealerships are in business and expect to make a profit from each sale. When you take your car for a trade-in, the dealership’s appraiser will determine the value of your vehicle. You need to note that just because you have seen a car similar to yours selling at $5,600 in the market, that doesn’t mean you will get the same value when you trade it in.

Dealers look at the condition of your car when coming up with the value. If your vehicle has high mileage, several dents and is not in excellent mechanical condition, its value will be negatively affected. The dealer will negotiate for a lower price, knowing that they will turn around and sell it at a profit. You will be in position to negotiate a better rate for your trade-in when you are prepared.

Monthly Repayments

Most car buyers are concerned about monthly repayments more than the overall cost of the car. Many dealers know this. This is the most beneficial arrangement for dealers. Dealerships liaise with banks to offer financing to their clients.

Your monthly repayments are linked to how much you are willing and able to pay as a down payment. For example, if the required down payment for a car is $5000, but you can only pay $3000, the dealer may give you the option of a higher monthly repayment for a shorter period, or a lower monthly rate which you will pay over a more extended period.

Commissions from the Financial Institutions

When you visit several dealerships, you will find out that many offer financing for their vehicles. Most of these dealerships represent several financial institutions. For each loan sold, the dealership earns a commission from the financing institution.

It is important to note that dealerships that sell new cars do not make as much profit as those that sell used cars. This is because the price of new vehicles is more or less the same across all states. For example, the starting price of the 2019 Ford Edge is $29,995. Every buyer interested in this car knows how much it costs. If you walk into a dealership and are told it costs $35,000, you will naturally realize you are being asked to pay more than the market price.

Used car dealerships have greater flexibility when it comes to pricing. They price their cars based on condition, demand and features.

used vehicle average-selling price in the us 2007 2017

Used vehicle average prices are soaring in the USA. Source: Statista.com

How to Avoid Being Ripped Off by a Dealer

Don’t Sign any Papers Until You are Convinced about the Purchase

A car salesperson will try to get you to commit to the purchase even when you are not sure about the figures. Unfortunately, buying a car can be an exhausting process. Sometimes buyers want to get it over and done with so they quickly close a deal without fully understanding the financial implications of the purchase. Don’t fall into that trap. If you’re not sure about the car, it is better to just walk away than buying it.

Further Reading

Arrange Financing First

Since this is the area where most dealerships make the most money, you are likely to make a saving if you arranged financing with your bank. The interest rate may be lower, and the funding is not necessarily linked to a sale, as would be the case in the dealership.

Ensure When You Trade-in Your Car it’s in Good Shape

Dealers look at the condition of your car when bargaining for a lower price. It is best to reduce the possibility of losing money by fixing any dents or worn-out parts. It is normal to get rid of a car in its current condition and leave any repairs to the buyer. However, since this will affect how much your trade-in will be worth, you should make an effort to get the best price possible.

Negotiate the Price of the Car

When trading-in your car, you will find yourself negotiating several things at the same time. You will attempt to get the best price possible for your trade while trying to bargain for a lower price for the car you would like to buy. You will also be negotiating for a favorable monthly repayment. All these figures can be a little confusing and exhausting, especially if you don’t have a history in finance. It would help if you negotiated every aspect of this transaction independently.

Find out the price of the car you wish to buy, and that of your trade-in. When negotiating, try and get a better rate than the trade-in value without getting to the amount you would have got as a private seller. For example, if the trade-in value of your car is $1,200 and the price if you found a buyer is $2,400, determine the amount you are most comfortable getting for your car, say $1,600.

If you have not traded-in your car before, it is essential to remember you are going to people who do it every day. Car dealers have more experience and negotiating skills than you do. However, when you have sufficient information about the value of your trade-in, the car you would like, and financing, you are in a better place to get an acceptable deal.

A Better Way

But there is a better way to get the most value out of your old car. Instead of trading it in at the dealership, you can sell it independently at an online auto auction platform like Auto Auction Mall. Make as much money as you can from your old car – and then use that money to buy a new car at one of Auto Auction Mall’s auctions.

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