How do trade-ins work for cars?

Trading in your car at a dealership is one of the easiest ways to let go of your current ride—especially if you’re looking to buy or lease a new or used vehicle. Here’s how it works: you sell your car to the dealer, and they’ll apply the amount they offer you toward the price of the vehicle you want. It’s often a faster and more convenient option than selling it privately.

While the process is straightforward, there are still a few things to keep in mind before moving forward, like knowing how much your trade-in value is and how to switch your car insurance. Ready to trade in your old car for a new one? Let’s walk you through it!

Understanding car trade-ins

When you’re buying a new or used car from a dealership, trading in your old car might cross your mind. But often, people aren’t sure how much their vehicle is actually worth. So, the first step if you’re considering a trade-in is to find out the value of your car.

Once you know how much it’s worth, you can head to the dealership and start shopping for a new car. The dealer will factor in your trade-in value during negotiations, and you can decide if it’s a good deal. If you accept their offer, the trade-in value gets deducted from the car’s purchase price.

Trading in your car is much easier than selling it yourself. Think of the dealership as a one-stop shop—you can drop off your old car and drive off with a new one the same day. It’s a hassle-free way to get rid of a car you no longer want. Continue reading below to learn more:

Important trade-in terms

Here are some terms you may want to familiarize yourself with when it comes to trading in a car:

• Trade-in value is the amount the dealer offers based on industry standards, your car’s condition, and how in-demand it is in your area.
• Wholesale price is what dealers pay when they buy used cars at auctions. It’s usually lower than other trade-in values, as it’s adjusted based on the car’s condition and age.
• Retail price or value is the full price a dealership sets for a brand-new vehicle.
• Private sale price is what you get for selling your vehicle privately and is typically higher than what you’d get from a trade-in.
• Positive equity means your car is worth more than what you still owe on the loan. After the loan is paid off, the extra amount can go toward the car you’re buying, reducing how much you need to borrow.
• Negative equity means you owe more on your car than it’s worth. If the loan balance is higher than the trade-in value, you’re considered to have negative equity, or you might hear it called being “upside down” or “underwater” on the loan.

What is the trade-in process for trading in a car?

Before making a decision, it’s important to understand how trading in your old car for a new one works. When you know what to expect, you’ll be able to make the best financial choice for you. We will outline the car trade-in process below:

1. Determine your trade-in value

A big part of deciding whether to trade in your car is knowing its value. You’ll want to find out how much the dealership might offer and how that compares to selling it privately. If your car is fully paid off, it’ll be easier to figure out its value. But if you still owe money on it and have negative equity, the trade-in price will be lower.

To keep negotiations in your favour, it’s a good idea to use an online car-pricing guide to figure out your car’s value before heading to the dealership. Make sure you have details like the year, make, model, trim, mileage, and overall condition of your car handy for the most accurate estimate.

2. Find out how much you still owe

If your car title is clear and free of liens, you’re all set to head to the dealership and look into your trade-in options. If not, check with your auto lender about paying off your existing loan early—but be cautious of any prepayment penalties.

You can still sell or trade in a financed vehicle, but how you move forward depends on whether your car is worth more or less than what you owe. If you have positive equity, you can apply the extra value as a down payment on your new vehicle, potentially lowering your monthly payments. However, if you have negative equity, you’ll need to either pay the difference upfront or roll it into a new car loan.

3. Gather your trade-in vehicle’s documents

Next, gather the details the dealership will need about your car. This includes your:

• Loan information, which includes your account number and remaining balance.
• Vehicle registration for proof you own the trade-in vehicle.
• Maintenance records can help you get a higher trade-in value by showing that you took regular care of your vehicle.
• Proof of insurance.

4. Put your negotiation skills to the test

When you get to the car dealership, you’ll start by test-driving a new or used car and picking the one you want to buy. You’ll discuss the price and negotiate until you reach an agreement. Car dealers often start with low trade-in offers, so it’s up to you to negotiate for a better deal. Don’t settle for anything below the minimum value listed in industry guides—if the dealer won’t budge, it’s worth checking out other dealerships. You are not required to trade your vehicle at the dealership you will be purchasing from; you may decide to sell your vehicle to one dealer and purchase from another.

Once you’ve settled on a price, let the dealer know you’re interested in trading in your current car. This way, the trade-in doesn’t affect the price negotiation upfront. Trade-in offers can vary depending on what the dealer already has in stock, the condition of your car, and how likely they think it will sell. To strengthen your position, you can get a few trade-in quotes and car loan preapproval offers from other dealerships. Make sure to get everything in writing and be mindful of any extra dealer fees.

5. Finalize your trade-in offer

Once you and the dealer settle on a trade-in value for your car, it’s time to sign the paperwork. Be sure to read everything closely and understand both the trade-in value and the cost of your new car—since you usually can’t return a car once the deal is signed. Watch out for any add-ons or features you didn’t agree to. If you need financing, make sure to explore different auto loan options to find one that fits your needs and budget. After that, it’s time to take your new car home!

Ready to trade in your car and need the right insurance coverage? Contact BrokerLink today to explore our tailored auto insurance options. Our experts will help ensure you get the best rates and comprehensive coverage for your new ride. Don’t wait—secure your peace of mind with BrokerLink now!

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What are the benefits of trading in a car?

Parting with your car can be tough, especially if you’ve had it for a while. But eventually, it’ll need to be replaced. One of the easiest ways to do that is by trading it in at the dealership. We will discuss the numerous benefits of the trade-in process below:

It makes everything quick and easy

To get started, just head to the dealership where you plan to buy or lease your new car and let the salesperson know you’d like to trade in your old car. They’ll take it from there. After a test drive and appraisal, the dealer will make you an offer. Instead of cash, the offer will usually go toward the price of the new car. If you agree, all that’s left is to sign over the title and finalize the deal.

You could sell your car privately, but that’s a more time-consuming process. You’ll be responsible for marketing the vehicle, showing it to potential buyers, negotiating the price, and handling the paperwork to complete the sale and transfer the title.

You can do everything in one place

The convenience of trading in your car comes from the simplicity of the process. You just drive your old car to the dealership and drive your new car home that day. You don’t even need preapproval for financing.

However, it’s actually a smart idea to have preapproved financing. While dealerships can arrange a new loan for you, without a pre-approved offer from an outside lender, they may not work as hard to find you the best deal. Essentially, the dealership can handle everything—finding your new car, arranging financing, and taking your trade-in—but it’s still up to you to make sure you’re getting a fair deal on each part of the transaction.

On the other hand, if you decide to sell your car to another dealer or a third party, you’ll likely need to visit multiple places to complete the sale. You’ll also need to negotiate the sale price separately from the purchase of your new car. But while this takes more effort, it’s still a good way to ensure you’re getting the best deal on both ends—selling your used car and buying your new one.

Dealers handle all the paperwork

Selling a car involves a lot of paperwork, and it can get even more complicated if you’re selling in a different province or territory than where the car was registered. When you trade in your vehicle at a dealership, they handle all the paperwork for you. They know which documents to file, so all you have to do is sign. Keep in mind, though, that there’s usually a document fee for this convenience.

Dealerships pay off your existing loan balance

Even if you owe money on your car loan, you can still trade in your vehicle. It’s pretty common for car dealers to handle paying off your old financing. What they’ll do is pay off the remaining loan balance and get the car’s title directly from your lender. Then, if you have positive equity in the car, that amount can be applied as a down payment toward your new vehicle or lease.

You get a sales tax credit

Trading in a car in Canada can offer big tax savings, often referred to as a car trade-in tax credit. This isn’t a government incentive but comes from the way taxes are calculated. When you trade in your car, the value of the trade-in is subtracted from the price of the new vehicle, and you only pay tax on the reduced amount.

Here’s what we mean. Let’s say you’re buying a new car for $55,000, and you’ve worked out a trade-in deal where the dealer offers you $18,000 for your used car. This means your net payment is $37,000. In Canada, you’d only pay sales tax on that $37,000, not the full $55,000 price of the new car.

Are there any downsides to trading in a car?

While trading in your car at a dealership is easy, it may not always give you the highest return for your used vehicle. Before heading to the dealership to start shopping, here are a few things to keep in mind:

You may not get the highest price for your car

When trading in your car, you’ll likely only get the wholesale value, which is often much lower than what you could get by selling it privately. If you’re looking to get the most money from your used car and feel confident in handling the sale, selling it yourself is the way to go.

You could end up with a bigger loan if you’re already underwater

When you owe more on your car than it’s worth, you’re in a situation known as negative equity, being upside down on your loan or underwater. In this case, trading in your vehicle at a dealership may not make the best financial sense. If you can’t sell the car and use that money to pay off the loan, you’ll need to find another way to cover the difference.

For example, if you owe $25,000 on your car but the dealer only offers you $18,000, you’d still owe $7,000 to your lender after the trade-in. If you have the cash to pay off that $7,000, great—but if money is tight, your options shrink. Many dealers and lenders will offer to “help” by adding that $7,000 onto your new car loan, using the extra amount to pay off the old loan. While this may sound convenient, it’s a risky move. You’ll end up starting your new car loan with negative equity right from the start.

What do dealerships do with trade-in vehicles?

Once you’ve agreed to trade in your car, the dealership will take possession of it and try to sell it as a used vehicle. Dealerships make a good portion of their profit from selling used cars, and trade-ins help keep their inventory stocked. If your car is in good condition, it’s likely in high demand, and the dealership will recondition it by making any necessary mechanical repairs, getting it safety certified, and cleaning both the inside and outside.

If your car isn’t a good fit for their lot—maybe it’s too old or has too many kilometres—the dealership will either wholesale it or send it to auction. We will provide detailed discussions on both topics below:

Wholesale

If a dealer doesn’t think your car is a good fit for their lot, they might choose to wholesale it. This often happens if the car is over six years old or has high mileage. The vehicle will go through a series of resale tests, and if it doesn’t meet the dealership’s standards, they may sell it to an auto broker.

Wholesaling might also happen if the dealer already has too many similar models on the lot or if your car is a different brand than what they usually sell.

Auction

Dealerships often send cars to auction if they don’t fit their inventory needs. But while dealerships might make some profit at auction, it’s risky, so they have to consider potential losses. That’s why trade-in appraisals can sometimes seem low—the dealer is factoring in the risk. Therefore, if your car is in rough shape and has high mileage, you might get more money by selling it privately.

Can I trade in a financed vehicle?

Yes, you can trade in your car even if you still owe money on it. The key factor to consider is your car loan. It’s a good idea to contact your financing company to find out how much you owe on your vehicle.

If you do, compare the trade-in value of your car with the remaining loan amount. If the trade-in value is higher than what you owe, the process is simple. The dealer will pay off the loan and get the car’s title from your lender. If you have positive equity, it can go toward the down payment on your new vehicle.

Even if you have negative equity, you can still trade it in; though, it may not be the ideal choice for many buyers. That negative equity will be added to your new car loan, meaning you’ll start your new car loan with negative equity right from the moment you drive off the lot. Plus, since your new car will lose value as soon as you leave the dealership, your negative car loan will be pushed even further underwater.

Can I transfer my car insurance to my new car?

Yes. When you buy a new car, you’ll either need to transfer and update your existing insurance or get a new policy. This is because the make, model, trim, and year of your car affect your insurance premium. So, if you switch vehicles, your rate will likely change too.

It’s also smart to review your coverage when getting a new vehicle, especially if it’s newer or more expensive. In that case, you may want to add extra protection like comprehensive or collision coverage.

Fortunately, switching insurance to another car is pretty convenient and can even save you time and money. Since you’re already with the company, getting an updated quote should be easy. You can also get quotes from other insurers to compare, either by contacting the insurance companies yourself or working with a trusted insurance brokerage like BrokerLink. With these quotes in hand, you’ll have everything you need to make the best decision.

If you decide to stay with your current insurer, just let them know you want to move forward with the quote and transfer your coverage to the new car. This is often the easiest option, as it skips the hassle of applying for a new policy and gets your new vehicle insured quickly so you can hit the road.

What insurance coverage do I need when buying a new car?

Switching or purchasing car insurance in Canada can take anywhere from a few minutes to a few hours. The good news is that your new policy usually kicks in quickly, allowing you to trade in your old car and drive home your new one the same day.

When getting car insurance, there are certain types of coverage that are mandatory in Canada, while others are optional and still equally important. It’s good to remember that sticking to just the coverage you need can save you money, especially if you’re a safe driver. Here are the common types of car insurance people typically choose:

• Third-party liability coverage
• Accident benefits coverage
• Uninsured automobile coverage
• Direct compensation-property damage coverage
• Collision coverage
• Comprehensive coverage
• Accident forgiveness coverage

Need car insurance? BrokerLink can help!

If you’re ready to trade in your car and need to swap your car insurance over to your new vehicle and update your policy, don’t hesitate to contact BrokerLink. You can reach us by phone, email, or in person at any one of our locations across Canada. Our brokers are happy to answer any insurance-related questions you may have. You can also take advantage of our free car insurance quotes by using our free online quote tool today.

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FAQs for how do trade-ins work for cars

What happens to cars when you trade them in?

After you agree to trade in your current vehicle, the dealership takes ownership and will try to sell it as a used vehicle. However, if your car doesn’t fit their inventory—maybe it’s too old or has too many kilometres—they’ll either wholesale it or send it to auction.

Do you save tax when you trade in a car?

Yes. In Canada, when you trade in your car, the trade-in value is deducted from the price of the new vehicle, so you only pay tax on the lower, adjusted amount.

If you have any questions, contact one of our local branches.