The new car you bought 3 years ago for $30,000 is worth just over $15,000 today, and you’re thinking it might be time to trade it in before its value vanishes completely.
While getting rid of that used vehicle might seem like the smartest move, you shouldn’t use the last couple of years of depreciation as an indication of what will happen next. It’s important to carefully consider timing and value to understand the best time to trade in your car.
When is the Best Time to Trade in a Car?
Many people believe that you should trade in or sell your car every 2-3 years. While getting a new car might seem exciting, is trading in your current car worth it?
There are several ways to determine if it’s worth making a change. Start by looking at your car’s trade-in value, or the dollar amount you will receive from selling your car to a dealer when buying a new one. If it’s high enough to give you a low monthly payment, it may be worth considering.
Another factor to consider is current maintenance costs. Does your current car need some work that might cost you a small fortune? Looking into buying a new car that doesn’t need costly repairs might be a better route to take. Create a budget to learn if these repairs will fit into your monthly expenses.
Every car is different, so it’s important to consider your unique situation. However, there are some basic calculations that can help you decide if trading in your car is the right decision.
How to Calculate the Best Time to Trade in Your Car:
Imagine that you had a car that costs $30,000. During the next 3 years, the value is reduced to $15,000. If you take the difference between the original price and the current price, you’re left with a depreciation amount of $15,000.
(Purchase price)$30,000 – (Current value)$15,000 = (Depreciation)$15,000
If you divide the depreciation amount by the number of months you have owned the car, you will find that you paid $416 per month in depreciation to own the vehicle.
(Depreciation)$15,000 / (Months owned)36 = (Depreciation per month)$416
However, if you continue to own the vehicle for another 3 years, you may see the value of the vehicle will drop from $15,000 to $13,000. That means that for the next 3 years, you will only have paid $55 in depreciation every month.
(Current value)$15,000 – (Value in 2 years)$13,000 = $2,000
(3 years of depreciation)$2,000 / (Months from present)36 = $55
Ultimately, if you keep the car for 3 years, you “lose” $416 per month in value depreciation. But if you keep the car for 6 years, you only “lose” $236 per month.
(First 3 years of depreciation)$15,000 + (Next 3 years of depreciation)$2,000 = (Total Depreciation)$17,000
(Total depreciation over 6 years)$17,000 / (Total months owned)72 = (Depreciation per month)$236
This math shows that it makes more financial sense to keep the car longer. Keep in mind that “losing money” due to depreciation is not a complete loss. While it is money out of your pocket, you will also have use of a well-running car, a value that is harder to quantify but should still be a factor.
Cars typically lose value faster in the first 2 years of ownership. Once you’ve weathered that stretch, the value will drop much more slowly.
How to Trade in a Car
Trading in a vehicle is a matter of doing your research and shopping around. You want to find a dealership who is willing to give you as close the amount your car is worth as possible.
Start by doing research on your car’s value. Use resources like Kelley Blue Book or Consumer Reports to determine the estimated average value of your car’s make, model and year.
The next step is to shop around for the best trade-in value. Visit a variety of dealerships, including second-hand lots and official dealers to find the best offer. Don’t forget to bring any necessary documents, including:
- Your driver’s license
- Car title
- Any other ownership documents
Can You Trade in Your Car Before You’ve Paid it Off?
While the trade-in process can seem straightforward, you may be wondering how you can trade in your car that you haven’t completely paid off. If you still owe money on your auto loan, there are extra steps you need to take before making the trade.
When you take out an auto loan, the car is used as collateral until all the money has been repaid. In most cases, it’s in your best interest to pay off your car loan before you trade in your car. That said, it’s still possible to trade in your car before it’s paid off. As long as you’re not behind on your car payments, most dealerships will allow you to transfer the remaining amount of your loan to the new car’s loan. This means that if you finance your new car, your car payments will likely be higher than if you waited to trade in your car until you finished paying off your loan.
This is the part where you consider the equity of the car. Equity is the value of an asset that you own. There are two types of equity situations you may find yourself in:
- Positive equity – If you’ve determined that your car has an $8,000 trade-in value and you only owe $5,000, then you have $3,000 worth of positive equity. That equity can be used towards your new car loan.
- Upside-down equity – If you find out that your car only has a $5,000 trade-in value and you owe $6,000, then you have a negative or “upside-down” equity amount of $1,000. This is the amount you will have to pay out of pocket to the original auto loan lender before you can trade the car in.
Before signing any documents, make sure that you have contacted your original auto loan lender to inform them of your decision to trade-in. They may even offer an alternative auto loan solution for your new car at a reduced rate.
Trading in a Car for Lower Payments?
If you’re looking to trade in your car because your current payments are too high, you may have more financial troubles related to debt than you realize. Talk to our certified financial coaches today to get expert personal finance guidance and help with unsecured debt you may be facing.