Can You Trade in a Car Worth More Than the One You Are Buying?

There are many reasons why you might want to trade in your more expensive automobile on a cheaper, more affordable one. Cheaper cars usually get better gas mileage, have lower insurance premiums and require lower monthly payments. Several factors can influence your transaction with a car dealer. Just be aware that the deal might not turn out as favorable as you think.

Your car automatically depreciates in value by about 10 percent the second you drive it off the car lot and another 10 percent by the end of that first year. The exact figure depends on the make and model. Some vehicles hold their value better than others and will fetch a higher price at trade-in. The condition of your vehicle also contributes to its trade-in value. The National Automobile Dealers Association and Kelley Blue Book offer guides to help you determine the trade-in value of your car.

If you still owe money on the car you want to trade in, first determine whether it makes sense to do so. If you owe more on the car than it is worth, you have to roll over the excess into a new car loan on your new vehicle. For example, if you owe $20,000 on your car, but its book value is only $12,000, you are upside down by $8,000. When you purchase the new car -- even if it is less expensive -- you must roll over the additional $8,000 into your new financing, unless you choose to pay the difference at the time of the transaction. If you don't pay the difference, you may end up with payments that are as high or higher than your original financing agreement. Either way, you are taking a substantial financial hit by trading your car in at this time.

If you want to trade in a more expensive car for a cheaper one, the best scenario is to own it free and clear. It should have numerous options, which will have caused it to depreciate more slowly. The vehicle should be in good to excellent condition. It should not have body damage or major mechanical issues.

When it comes time to make the trade, bring your vehicle's title. If you don't own your car, bring documentation from the lender that they will provide the title when the transaction is complete. Any maintenance records you kept on the car should be transferred to the new owner. If you require financing for the new car, you will need to work with the dealer or receive approval from an independent source such as your credit union or bank

At the time of the actual trade transaction, your car dealer will pay you the difference between what your trade-in is worth and the price of the car you are purchasing. For example, suppose your trade-in is valued at $10,000 by the dealer, and you own it free and clear. When you trade for a car valued at $7,000, the car salesman will deduct any processing fees and costs from the excess $3,000 and provide payment to you in the form of a check. If you owe a small amount (for instance $2,000) on your trade-in, your car salesman will pay off your old loan and pay you the difference ($1,000), minus processing fees, etc. You might also have to pay state sales tax on the entire purchase price of the vehicle you are getting, depending on what state you live in. Some states only charge taxes on the net sales amount after the trade in. In this case, you would owe nothing.