The most confusing part of purchasing a car at a dealership is dealing with your trade. It’s sometimes hard to get a valid response to the query, “What are you giving me for my trade-in?”
Most of the time, it?s not a scheme by the dealership to be mislead consumers. The reality is that the true value a dealer places in a trade in is much lower than customers want to hear.
Actual cash value and trade-in allowance are the major factors and mean completely different things most of the time. The number the customer sees is always trade allowance, and sometimes that number is also cash value. It is often, though.
Actual cash value (ACV) is nothing more than exactly what it says. It is the replacement cost for that particular vehicle. If the customer were to take their vehicle to a dealers? auto auction, the ACV will be close to or exactly what the car will bring.
Allowance takes actual cash value and adds any profit the dealer is willing to slice off the top of the deal. It?s the amount they show the customer for their trade.
Let’s say the dealer asks $19,000 for a Honda Accord. They probably have a cost around $16,500.
Let?s also say that the Camry the customer is trading has an actual cash value of $4500.
If the dealer wants to make $1,000 on the deal they can do one of two things, or anything in between. Here are the three scenarios, all yielding a $1000 profit:
1) They can sell their Accord for $1000 over cost ($17,500) and give the ACV of $4500 for the Camry.
2) They can sell their Accord for the asking price of $19,000, but offer the trade allowance of $1500 over ACR, or $6000.
3) The can take a little off on the Accord and sell it for $18,500, then add a little to the ACV and offer a trade allowance of $5500.
No matter how it?s sliced, the dealership makes $1000 on the deal. Notice that the trade difference (selling price minus trade allowance) is $13,000 no matter how the numbers are presented.
Consumers wonder why dealers can?t just be straight forward about it. The reason is that customers are more likely to walk away from a deal because they didn?t get enough for their trade than they will if they didn?t get a big enough discount.
It?s pride, plain and simple. Almost everyone believes their vehicle is worth more than what it is. They also want a discount. This is why option 3, a little discount plus showing a little higher for their trade, is the option that seems to work best.
It?s similar to many other kinds of marketing outside the car business. Which sounds better: ?buy one, get one free? or ?half price when you buy two?? They mean the same thing, but people respond differently to a deal based upon how it is presented.
Most cities have a handful of dealerships that give cash bids on cars. Many local car dealers will still stroke consumers a check for their vehicles. It?s a great way to find out ACV.
Another option is to check the online used car search websites. Used car classified websites can tell you what vehicles similar to yours are getting listed for at dealerships. Take the average asking price for these vehicles and subtract $2000-$4000. This will yield a relatively accurate range of how much a car is worth.
Consumers should take this information with a grain of salt. Just about everything is negotiable in a car deal. Be patient and get as many true appraisals at car dealerships as possible. No matter what, don?t get too anxious.
It?s a consumer?s market right now. Don?t be afraid to ask a little more and be prepared to walk out. It?s the best advice you?ll find on the net for car buying.