Fast facts about trading in a car
For car owners, an age-old question is: should I keep my car or trade it in? It’s not easy to answer because the best time to change a car is a moving target. Every situation is different and every vehicle is different. The value of anything is determined by how much someone is willing to pay for it. For example, was a 1969 Chevy Camaro ZL1 sold at Barrett Jackson’s Arizona auction this year really worth $770,000? It clearly has that value to someone.
Knowing when to switch cars to the best advantage requires more information than we have to work with. However, we will tell you some generalities and some constants that are often true. You can skip ahead to tips on how to trade in your car using the jump links below.
What is a used car trade-in?
A dictionary definition of a trade-in is relatively straightforward: it is an item of merchandise (such as an automobile) that is taken as payment or part payment for a purchase. Reminding you of the defined meaning of “exchange” is not because we assume you don’t know it. Obviously, you’re not reading this if you don’t. However, we will return to the exact meaning of a change later in this piece. Therefore, we decided to put the exact meaning at the top of this article. Stay tuned.
How long should you keep a car?
How long you should keep a car is up to you. The average length of new vehicle ownership in the US is 8.4 years. “Average” is the key word here. Some people trade automobiles like baseball cards, while others drive a car until the wheels fall off. However, when it comes to owners looking to trade in a car to get the most value when buying a new vehicle, there are a few key considerations to help maximize value.
Depreciation rate of the car
A car’s depreciation rate, especially in the early years, is the best indicator of keeping your ride or changing it. Every car depreciates, at least for a while. At some point, some cars might start appreciating again, like in our 1969 Camaro example above. However, in almost all cases, if you keep a car long enough, it will depreciate to its value of scrap metal In other words, keep a car long enough, and its only value will be for scrap.
According to data from Kelley Blue Book’s parent company, Cox Automotive, the average new car transaction price for the week of April 7, 2023 was $44,928. From this number, Cox’s vehicle valuation analysts determine the following average depreciation cost.
| Average New Car Depreciation Cost, April 2023 | ||
|---|---|---|
| Outside the lot | 4.3% | $1,952 |
| year 1 | 15.2% | $6,811 |
| year 2 | 15.7% | $7,073 |
| year 3 | 14.1% | $6,340 |
| year 4 | 12% | $5,420 |
Source: Cox Automotive
Related: Is Now the Time to Buy, Sell or Trade in a Used Car?
Average car mileage
The auto industry think tank is that 12,000 miles is the annual mileage standard. Most leases are based on this annual 12,000 mile number, as are most new car warranties. Similarly, when evaluating the value of a used car, 12,000 miles per year is considered average. In other words, a 3-year-old vehicle should have about 36,000 miles on the odometer.
However, mileage is not always the best or only consideration when calculating the value of a used car. For example, a well-maintained 3-year-old car with 50,000 mostly highway miles is likely to be in better shape than a neglected 3-year-old car with 36,000 city miles. Also, on average, some car models last longer than others, providing fewer reliability issues down the road and having a higher resale value. For example, in our 2023 Best Resale Value Awards, Kelley Blue Book crowned Toyota as the leading brand in resale value. Mileage, however, enters the used car value equation.
RELATED: Can I Afford a Car in 2023?
When to trade in a car
Determining that sweet spot to negotiate a car for its maximum value is a mixture of art and science. You can find out what your vehicle is worth today with Kelley Blue Book’s valuation tool. The figure it generates is widely known in the car trade as “book value”. You need to know these values to trade in or sell your car. Use the number to calculate the present value with your car finance loan payment amount.
When the book value is greater than the loan balance, the difference is your equity. This equity becomes at least part of the down payment on a vehicle you want to buy. This is the classic definition of a change, as described at the top of this story. As long as there is equity in your current car, as a trade-in, it becomes a down payment on another car transaction. In other words, it helps to reduce the amount to finance the new purchase. This is what a change should do.
The tricky part is guessing whether the value of a used car will go up or down in the future. Generally, this is not a major company because used car prices almost always fall. However, used car prices (and values) skyrocketed in 2022. While the average price of used cars looks set to drop in 2023, at the time of writing, they remain stubbornly high Our guess is, however, that the slide will continue.
On the other hand, automakers are getting back on track and dealer inventories will continue to grow. Having more cars on the lots lowers the dealers’ profits. And the increased stock also makes dealers more agreeable to negotiate prices while offering a wider selection of models. It’s compensation.
RELATED: Can I Finance an Older Car?
When not to trade in a car
While there are exceptions to this rule, as there are for most rules, don’t trade in a car that’s worth less than it’s worth. In other words, if you get less when you trade it in than the loan payment, don’t do it. In the financial world, this is what is called being “upside down” or “underwater”. The result of trading in a vehicle in which you are underwater is that you are transferring the same problem to your next vehicle. This is because the difference between what you owe and the value of your car is rolled into the amount financed on your next car. Consequently, right off the bat, you make sure that you will get deeper into the term of your next car loan.
Also, with most new car prices still at record highs, replacing your current vehicle with an overpriced new one may not make fiscal sense.
RELATED: Car Trade-In Tips: How Can I Maximize My Car’s Value?
Pros and cons of changing cars
Here are some reasons to trade in your car (pros) as well as reasons to keep it (cons). Consider all the pros and cons when deciding whether to trade in your car.
Pros
- fairness – The value is more than the cost of paying the financing; therefore, there is equity to pay for the transaction cost of a new car.
- Lifestyle change – Significant life changes, such as a new job, a baby, or some other development, require a change in your personal transportation.
- Repair costs – If your current car’s warranty has expired and you fear impending repair costs, replacing it with a vehicle with warranty coverage makes some sense.
- Fall in used car prices – If used vehicle prices continue to fall (an unknown), the book value of your car may decrease. Consequently, if you’re not underwater now, you could be if prices don’t adjust.
Cons
- cost – If trading in a car is going to cost you money, you should put it off as long as possible. When will it cost you money? When you owe more than the car is worth. Whether you cover the difference out of pocket or roll it into your next car loan, it will cost you.
- satisfaction – Forget for now if you have equity in your car; if you’re happy with it, why download it? Unless you’ve paid too much for it or the interest rate (unlikely you’ll have it for more than 18 months), it’s probably better to keep it. You have already absorbed the big depreciation hits.
- It has paid off – If you’ve managed to pay off your current car and don’t hate it, consider holding onto it until the market settles and interest rates come down. Even if you find yourself spending a little on minor repairs, those expenses will likely be less than taking on the costs of a new vehicle. Be patient and put some money down for a bigger down payment.
