Purchasing a car has always been one of the most difficult choices you can make throughout your lifetime, even more so if you already have an existing vehicle lying around. A huge part of this decision would be how you plan to finance the car. One of the most obvious solutions would be to get rid of the old car and use the money you get from the transaction as a down payment for the new one.
However, you must remember that apart from selling your old car online or through a dealership, you also have the option to trade it in, wherein the decision becomes even more perplexing.
With that said, this article will guide you through everything you need to know about your two options when financing your car. It might be best to start with each of their definitions.
What Does It Mean To Sell Or Trade In A Car?
When you plan to sell a car, you’re essentially finding a buyer yourself to ensure you get the most money out of the used car. This would mean you’ll be the one to put in the time and effort.
On the other hand, if you plan to trade in a car, the trade-in process is generally handled by the dealership where you plan on buying a car. They’ll sell your old car, then deduct the selling price from the down payment for the new car. If you’re currently on the lookout for a dealership that’ll allow you to trade in your old car, you might want to buy cars here.
You may already see how each option differs from one another, although there are similarities. For example, regardless of which option you choose, there’s always a sales tax.
Sales Tax On Selling Vs. Trading A Car
It’s worth noting that you’ll have to pay a sales tax both for trading in or selling a car. For your reference, a sales tax is the tax you pay for selling a particular product or offering specific services. The average sales tax rate is 5%, meaning if you sell a car for USD$20,000, you’ll have to deduct USD$1,000 from that figure, so you only get USD$19,000.
While the rate won’t change regardless of which option you choose, you can drastically reduce the sales tax if you trade in the car instead of selling it to an individual or an agency. This is because most countries calculate the tax from the difference between the price of the new car you want to purchase and the trade-in value. Suppose you trade in a car worth USD$15,000 and buy a new one for USD$20,000, the 5% tax rate would only apply to their difference, which is USD$5,000, yielding to a meager USD$250 tax for the entire transaction.
Meanwhile, if you sell the car without the help of any dealership for the same amount, which is USD$15,000, the 5% tax rate would apply to the entirety of the selling price. Ultimately, you have to pay USD$750, which is considerably higher than when you trade it in. This is one of the advantages of trading a car into a dealership over selling it yourself.
But of course, selling a car also has its respective advantages over car trade-ins.
Car Value From Selling Vs. Trading In
It’s a well-known fact that selling yields more money than trading. While you may have to shoulder the maintenance and repairs for your car, the car value would usually be a lot higher if you sell the car yourself rather than when you trade it in and let the dealership handle the transaction.
Say, for example, you want to sell a BMW 3 Series. If that’s the case, the BMW 3 Series may cost around USD$20,000 pin the market if you sell it yourself, and that’s after taking into account the deprecation after 10 years.
However, dealerships may only deduct USD$15,000 from your car purchase if you trade it in. As you can see, the difference of USD$5,000 is quite considerable. This is why many car owners choose to sell it themselves as it offers a higher sales value despite the higher sales tax that comes with it. But of course, you should never forget that negotiations should always be part of the transaction.
Handling The Negotiations
Many people assume that they can’t negotiate with car dealerships, but dealerships are actually flexible with their trade-in value estimates. So, if they say they can deduct USD$7,500 from your down payment, they may only be lowballing you, and it’s possible to deduct up to USD$10,000. In short, there’s room for negotiations regardless of the option you choose.
But of course, if you sell the car yourself, you’ll be handling the transaction from start to finish and doing all the legwork. So, not only will you handle the negotiations, but you must also deal with other matters such as placing ads, taking the car for repairs, and more, which can be extremely tiresome. This is yet another advantage of trading a car over selling it—it’s less hassle.
Which Should You Choose?
As you can see, each option has its advantages and disadvantages. Selling ensures that you get more from the transaction, but it can be tiresome as it requires you to do all the work yourself. Moreover, the sales tax that comes with selling a car is nothing to scoff at.
Meanwhile, if you trade in your car, you can save yourself from all the hassle and let the car dealership handle all the work for you. Plus, since the sales tax applies to the difference between the new car price and trade-in value, the tax you have to pay would be much lower. But of course, since the car dealership handles the transaction, they can lowball the price as much as they like.
Ultimately, the decision is yours to make. But as a suggestion, it might be best to sell the car if you aren’t necessarily busy. Otherwise, you should trade it in to save yourself a lot of time.