Trade-In vs. Private Sale

Trade-In vs. Private Sale

Consumers are generally able to privately sell their used vehicles at a higher price than a dealer would allow for a trade-in. This only makes sense, considering in a private sale, a used vehicle is offered at or just below the retail price, while in a trade-in scenario, the dealer offers a price closer to the (lower) trade-in value. Many new car dealers only offer customers a "wholesale value" for their trade; a dollar amount below trade-in and much less than retail value. The wholesale price quote is commonly offered by new car dealers when the vehicle in question is several years old (and therefore not viable for sale on their lot). The car is generally sent to a “dealers only” auction for re-sale to yet another auto dealer!

Weigh the pros and cons in evaluating whether a possible higher price you could get from a private sale offsets the potential "hassle" of selling your own vehicle, and make an informed decision.
Financing a Vehicle at the Dealership
Many dealerships are equipped to offer their customers financing when purchasing a vehicle.  New car manufacturers like General Motors, Toyota, and Ford all have captive financing companies available that extend credit (indirect loans) for an automobile purchase. Most dealerships also make arrangements with a wide variety of other lending sources (banks, savings banks, credit unions and finance companies) which can make loans on an indirect basis as well.  A number of used car dealers offer their own financing through so-called “buy-here-pay-here” arrangements. 

Borrowing Choices…Local Lenders vs. the  Dealership?

When at the dealership, ask what the lowest APR their indirect lenders are offering. If this figure is less than the lowest APR you found elsewhere through comparison shopping with direct lenders, you should consider financing through the dealership. In order to prevent multiple inquiries on your credit report (which can lower your credit score), make sure to specify that you don’t want your credit application forwarded to multiple indirect lenders, but only to the lender the dealer has identified that has the lowest APR. Smart!
The Length of the Loan: Longer Terms = More Interest (Finance Charge)
While the maximum auto loan term was once 60 months, nowadays it is not unheard of for some lenders to offer loans or credit contracts lasting 72 months or longer. Even though a longer-term loan reduces the monthly payment amount, it means higher interest and results in higher total financing charges ($) on a rapidly depreciating asset (your car). The longer you stretch out your auto loan, the less you will pay monthly but the more you will pay overall in finance charges.  In addition, longer loan terms are generally priced with higher APRs.




Many consumers report that immediately upon visiting an auto dealership a salesperson approaches them and asks: “How much can you afford to pay each month?” While this is certainly a reasonable question for a sales representative to pose to a customer, a primary focus on only the monthly payment amount, and not the sale price of the vehicle, proves a very superficial way for a financially-responsible consumer to approach car buying/financing. 
Down Payments
Unlike home loans, auto loans require the borrower to finance a rapidly depreciating item. In an automobile loan, the vehicle itself acts as the collateral to secure the loan. While homes generally gain in value over time, a new car's value may drop by 50% or more within the first three or four years of ownership.

While used car values certainly depreciate due to wear and tear, the depreciation of new cars is considerable, as many models lose thousands of dollars in value only months after being driven off the lot. This rapid depreciation underscores the importance of making a healthy down payment. A common mistake made by consumers when buying their new car or truck is taking advantage of seemingly attractive “no money down” financing offers. Consumers who make a small or zero down payment when purchasing a new vehicle find that the value of their car is almost immediately less than their loan's balance, resulting in negative equity, or being "upside down" in their car loan. In the event that the consumer wants to trade in the vehicle, he or she will likely owe more on the loan balance than the car is actually worth! The chart on the following page illustrates this point:

“No Money Down” Chart

   


After a down payment of 20% or more, the new auto's value is likely to remain higher than the principal balance throughout the loan’s term, allowing the consumer the flexibility to sell the vehicle at any point during the loan’s term and to use that equity toward the down payment on his/her next vehicle purchase. Larger down payments (20% or more) also improve a consumer's chance of being approved for a vehicle loan. 
Rebates and Cut-Rate Financing
Periodically, automobile manufacturers with excess vehicle inventory will offer potential buyers financial incentives to purchase their overstocked vehicles. Additionally, in order to reduce their inventories, manufacturers may offer low/cut-rate financing (such as 2.9%, 1.9%, or 0.9% APR), or cash-back rebates which can save car buyers hundreds/thousands of dollars. When a consumer is offered both cut-rate financing and rebates on a vehicle, little thought is needed in this win-win situation. However, when a consumer can only take advantage of either the cut-rate financing or the rebate, the situation can become a little confusing. Fortunately, the table shown on the next page may aid the shopper in this purchase decision: 

Cash Rebate v. Cut Rate Financing

Cash Rebate v. Cut Rate Financing
Auto sale price:  $29,999     Down payment:  $4,999    Amount Financed:  $25,000
Loan Term	Cash Rebate	APR	Finance Charge	Bureau Suggestion
24 Months 24 Months	$2,000   $0.00	7.9% 1.9%	$2,109    $498	Since the difference in finance charges is $1,611, take the $2,000 rebate and save $389!
36 Months 36 Months	$2,000   $0.00	7.9% 1.9%	$3,161    $739	$3,161 minus $739 = $2,422 Pass on the rebate and select the 1.9% APR
48 Months 48 Months	$2,000   $0.00	7.9% 1.9%	$4,239    $982	Since you save $3,257 by going with 1.9% APR v. the cash rebate, it’s an easy decision!

The previous chart demonstrates that selecting cut-rate financing is not always the most money-saving option. In many instances, lenders may offer APRs that are low enough to make choosing a manufacturer’s rebate the wiser choice. In order to make a well-researched decision, consumers should comparison shop for APRs  with direct lenders (banks, finance companies, credit unions) before visiting a dealership, and continue their “credit shopping” at the dealership with the lowest APR quote from an indirect lender (Ford Motor Credit, GMAC, etc.) serving that dealer.