This post was originally published on www.progressive.com
There’s nothing quite like buying a brand–new car. Free of dents, void of scratches, fragrant with that new-car smell, and complete with an odometer reading in the double digits.
I’ve been there a few times over the years, so I get the rush that comes with wrapping my hands around a sleek new steering wheel.
But there’s also a downside. As soon as you roll off that lot, that brand–new car is no longer brand new, and it starts depreciating in those very first miles.
According to current depreciation rates, the value of a new vehicle can drop by more than 20% after one year of ownership. Then, for the next four years, your car will lose roughly 10% of its value annually. After five years, a new car can be worth as little as 40% of its original purchase price.
And that’s being optimistic. Recent ownership trends and other factors have spawned a glut of used cars on the market. In 2017, investment bank Morgan Stanley predicted that used car prices will decline by 20% by 2021.
But there are some steps you can take to squeeze the most value out of your car when your thoughts turn to trading in or selling it.
Trade or sell?
When it’s time to shop for a new vehicle, the first big question you need to ask is whether you want to sell your current vehicle through a dealer or private sale. Pricing services such as Kelley Blue Book, Autotrader, and Edmunds show that you’ll likely get more from selling your car via private sale than from selling or trading to a dealer. The average seller gets $2,250 less on a trade to a dealer than they would selling to a private party, according to Instamotor.
The key consideration here is time and convenience. Selling your car can take weeks or more. You have to deal with advertising, showing it, going for test drives, and negotiating the price and financing arrangement. Meanwhile, selling or trading to a dealer involves little more than doing some homework, showing up to the lot, and coming to terms on the deal.
When’s the best time?
The advice on the best time of year to trade or sell your car is mixed. If you’re likely trading to a dealership, the last few months of the year can present opportunities. Dealers may be looking to meet quotas or eager to move last year’s models off the lot. That could lead to a more generous offer on your trade.
Additionally, some experts will tell you that if you’re going to sell, think about doing it in the warmer weather months—buyers are more likely to want to be outside and on the prowl for a new vehicle.
Simple supply and demand can also be a factor. It might pay to peruse car ads online or in the paper. If you’re noticing that a lot of people in your area are trying to sell, say, a Honda Fit in a particular month, you might want to wait until your car is in shorter supply.
In colder climates, if you’re selling or trading a car that handles well in the snow, it might pay to wait until the fall, when four-wheel–drive vehicles are in higher demand.
Benefit from break–even
What’s your break–even point? If you’re carrying a loan on your car, you’ll want to consider timing a trade around your break–even point—that’s when the trade value for the car is likely equal to or greater than the amount you owe the bank.
The reason, of course, is simple. Unless you’re able to sell the vehicle above trade price, you’ll end up paying the balance of your loan out of pocket. Generally, if you sign a finance agreement for 72 months, your break–even point will arrive between 48 and 52 months into the contract.
Take advantage of taxes
Depending on which state you live in, tax implications may offer the most compelling reason to trade instead of sell. Here’s why: if you live in a state with sales tax, you’ll get a break from trading in your car.
When you buy a car, you pay a certain tax rate. Yet when you trade in your old car, you only pay the sales tax on the difference between the original added tax from your purchase and the sales tax on your trade-in. For example, if your tax rate is 8%, buying a $30,000 car will cost you about $2,400 in taxes. However, if you have a trade worth $15,000, in many states you’d only pay the sales tax on the difference between the two. In this example, about $1,200.
So if you plan on selling that $15,000 car in the private market, you would want to get more than $16,200 to make up the tax difference. All things considered, trading would likely be a better route.
Don’t wait until there’s trouble
It’s just common sense. It’s much easier to sell or trade a car that’s in good working order than one that has a host of problems.
First, your car has more value if it is still under warranty. Beyond that, there is plenty of research out there to give you a better sense of when things might go haywire. J.D. Power, Consumer Reports, and RepairPal publish annual ratings that can provide considerable insight into the overall reliability of your vehicle, as well as specific problems that may occur over time.
If you want to dig even deeper, nearly every vehicle has dedicated user websites or Facebook pages where owners discuss problems they’re having and how much they cost to fix. If you learn that the transmission on your model typically fails at 70,000 miles, getting rid of the car at 65,000 miles might save you from being on the hook for a $3,000 repair bill. Of course, you should never hide an existing issue from a buyer.
Timing key milestones:
According to Edmunds, cars have three major mileage points, and each will affect the trade-in value.
First milestone: 30,000 to 40,000 miles
Generally, most new car warranties expire at either 36,000 miles or three years, whichever comes first. If you’re targeting this milestone, your best move is likely to sell a few thousand miles before the warranty expires or prior to a major service visit.
Second milestone: 60,000 to 70,000 miles
In a sense, this is when your middle-aged car is on the brink of being over–the–hill. Your car’s age will work against you during this milestone, but buyers still see the potential for a lot of miles after 70,000. During this milestone, cars that have been well cared for and regularly maintained have an advantage.
Third milestone: Under 100,000 miles
Because depreciation is constant, it’s best to sell or trade in your vehicle before it hits the 100,000-mile mark. At this point, you won’t get nearly as much for it because dealers generally see these cars as wholesale-only vehicles to be sold at auction. Franchise dealers like the option of being able to resell trade-ins as certified pre-owned vehicles, and if your car’s mileage is at or above 80,000 miles, it typically won’t qualify for this type of program.
Buying and selling a car always carries some risk. But by being mindful of these factors, you can maximize your chances of making the most of your investment—and fully enjoy the feelings that come with having new ride.