Should I sell or trade in my car?

When choosing your next car, you also must decide what to do with your old one. Trading it to the dealer or selling it to someone else are among the many options. But it's important to consider the advantages and disadvantages of each option before you make your decision.

Selling it yourself

The biggest appeal of selling a car yourself is the possibility you may get a better price, since you're doing the work of a dealer. Getting more money out of your car may be enticing but you'll have all the advertising, negotiations and title-work on your shoulders.

In some cases, the difference in price between selling the car yourself and using a dealer can be significant. Let's say you have a low-mileage sedan in good condition that could get you $8,000 if sold privately. A dealer may want to offer you $6,000 for it, knowing they plan to try to sell it for a price in the same range as a private sale. You have to decide if the benefits you get from trading your car in are worth the difference you would give up by not selling it yourself.

Of course, your own experience selling a car, or lack of, can influence which way you choose. In this case, ask yourself, is your time, energy and effort worth the extra $2,000 in your pocket?

Trading it in

Unlike a buyer in a private sale, car dealers may be less picky about the car's condition. Whether it becomes the pride of their used lot or is promptly towed to a junkyard, your old vehicle will be taken by most used car dealers based on the price more than anything else.

The better the condition of your car, the more value you have for negotiations. If your current car requires a lot of work or has obvious areas in need of repair or reconditioning, the dealer may use those projected expenses to reduce their proposed trade-in offer.

Dealer offers may also be lower because they often account for the cost of selling the vehicle as well as any risks associated with the sale. Dealers have to consider these factors while still turning a profit. But dealers will handle all the required paperwork associated with the sale, which can make it more convenient for you.

State sales tax

As you crunch the numbers, there may be more to the math than just pricing. It's also important to research how sales tax is handled in your state. Some states only tax buyers on the difference between the new car price and the trade-in value, which may make a trade more appealing.

If your trade-in offer is in the same range as what you can get from a private-party sale, trading your vehicle in becomes an easier decision. As the difference between the trade-in value and private sale price widens, you may find it more favorable to sell your car yourself.

Sales tax savings and the potential for you to deduct the state or local sales taxes you'll pay on your new vehicle, assuming you itemize your taxes, should still be considered.

Let's look at a few examples.

Say your new car purchase is $25,000 and your trade-in value from the dealer was $6,000. If your state sales-tax rate is 7%, you'd pay that on the net sales price of your new car. In this case, that would be $19,000 plus sales tax of $1,330, making your after-tax sales price of the car $20,330.

Without the trade-in considered, the after-tax price of the new car would be $26,750. While in this scenario you saved $420 in sales tax, the difference in what you could've received from your car in a private sale versus the trade-in amount is $1,580.

Private Sale

Trade-in

Cost or Benefit

The closer the private sale and trade-in values are to each other, the tax savings is a bigger factor in your decision. In this case, you'd have to ask if your time and effort are worth the $1,580 difference that could be in your pocket.

Higher-priced vehicles and trade-in values make the tax impact a slightly more competitive story. Let's use a $45,000 new car price and a trade-in value for your current vehicle of $20,000. Even though you may be able to get $22,000 in a private sale, the tax savings you'd get by trading in your car is much larger. The difference narrows to $600 in this example. While it's less than you could get from a private sale, it may be an acceptable decision for you to trade in your car.

Private Sale

Trade-in

Cost or Benefit

There's no guarantee that your car will sell at the values you find online, but they should serve as a benchmark for negotiations whether you sell it yourself or trade it in.

How to sell your used car

Before deciding against a trade-in, you should also consider what you'll need to do to get the best price for your used car.

First, your used car will need to be cleaned up, photographed and advertised. Expect emails, phone calls or text messages from prospective buyers, to arrange times and locations to show the vehicle. Some potential buyers may want to bring a mechanic or arrange for the car to be inspected by a repair facility.

Test drives should be expected as well. Be sure to get a picture of the potential buyer's driver's license in the event of an accident during the test drive. Auto insurance typically follows the vehicle, so you may be liable for any damage while your potential buyer is driving the car. Take reasonable steps to protect yourself and your property.

Have a price in your mind that you're willing to accept and stick to that price. You may not want to have to go back and forth, so set a firm price and be up front about it. Make sure your price is in line with the market for vehicles like yours. Check resources like Kelley Blue Book or Edmunds for pricing as well as listings for the similar cars to yours in your city.

Taking payment and staying safe

Keep in mind that you need to be careful with the exchange of funds and the potential for fraud and personal risk. Cash may be the most effective way to get paid; however, depending on the price of your car, the buyer may not want to carry that much cash and you may not want to receive it. A bank check or direct wire transfer may be a good option.

If you sell your vehicle online, escrow services may be available to help coordinate the sale while protecting both parties. Selling your vehicle to a car buying service may be easier than a private party through an auction site or online listing, but you'll likely get offered an amount like a dealer trade-in price.

If your sale is done in person, arrange a safe meeting place, like the parking lot of a police station or shopping center. It's also a good idea to bring another person with you as an extra precaution.

Also, make sure to document your transaction with a bill of sale that notes the car being sold is in as-is condition and the price.

Transferring ownership

Finally, you'll have to properly complete the paperwork your state requires to handle the ownership transfer. If you're trading your vehicle, the dealer typically handles this.

Check out your state's motor vehicle department website for specific instructions. Some states require a title to be signed by both parties and notarized, so some additional steps might be needed.

Once you have sold the vehicle, let your auto insurance company know that you no longer have the vehicle and cancel the insurance coverage you had for it.

Which way should you choose?

Run the numbers, and figure out what effort will be needed to sell your car at the price you want. Dealership sales can be quick, more convenient and provide potential savings on sales tax. Private sales can likely put more money in your pocket, but may require more of your time and patience. Ultimately, the choice is yours. Make the decision you feel most comfortable with.

As you start your search for your new car, getting an idea of your financing options ahead of a visit to a dealer may help you as well. Having preapproval for a loan or paying cash for your new car can help you focus on the trade-in value and new car sales price as the main items to negotiate.