Should you trade in your car or sell it privately?

A dealer buying your car has to resell it at a profit, so a trade-in offer is usually below what a private buyer would pay. That gap is the price of convenience: one visit, no listing, no strangers test-driving it, and the old car handled in the same deal as the new one. Whether the gap is worth it depends on its size, on what a private sale costs you, and, in many states, on sales tax.

Start with real numbers

Get the trade-in figure from more than one dealer. As the CFPB puts it, "Like shopping for an auto loan, you can get trade-in estimates from multiple dealerships and negotiate your trade-in value to get the best price." For the private side, use what similar cars have actually sold for, not their asking prices, and subtract what selling costs you: listing fees, detailing, an inspection, title fees, and your own time if you value it.

The sales-tax credit

In many states a trade-in reduces the price you pay sales tax on: buy a $30,000 car with a $15,000 trade-in and you are taxed on $15,000. At 7%, that saves $1,050, money a private sale does not earn you. Other states tax the full price either way, and some cap or exclude the credit. Check your state's revenue or motor vehicle department before you count on it.

The credit can decide the answer. With a $15,000 trade-in offer against $16,000 privately and $300 of selling costs:

• With the credit, the trade-in is worth $15,000 plus $1,050 of tax saved, $16,050, against $15,700 from the private sale. The trade-in wins by $350; a private buyer would need to pay $16,350 just to break even.
• Without it, the private sale wins by $700.

The trade-in or sell calculator works out both on your numbers, and shows the private price you would need.

If you owe more than the car is worth

Negative equity changes the stakes on both paths. Owe $18,000 on that car and the $15,000 trade-in leaves $3,000 unpaid; the $15,700 private sale leaves $2,300. The payoff comes out of either sale, so it does not change which path leaves more, but it does mean finding the shortfall.

At a dealer, it is often rolled into the next loan: "a dealer or lender may offer to roll the balance of your existing auto loan into a new auto loan, but this will make your new auto loan more expensive." The CFPB warns that a high loan-to-value ratio "means you will owe more than the car is worth - likely for a long period during the loan." If the dealer promises to absorb it, check the paperwork: "make sure it's not included in your new financing or your final loan contract." Paying the shortfall in cash, or keeping the car until you owe less, avoids carrying it forward. The car value calculator shows when your balance falls below the car's value, and the guide on how fast a car loses value explains why.

Selling privately with a loan still on the car

It is possible, with a few extra steps.

1. Get the payoff amount. It "might be different from the outstanding balance listed on your statement or coupon book because of the way interest is calculated, any outstanding late fees or charges, or for another reason." Ask about any prepayment penalty too.
2. Plan how the lien is cleared. Your lender holds the title until the loan is paid. A common approach is to close the sale at the lender or a bank, so the buyer's payment pays off the loan and the lender releases the title. Ask your lender how it handles a private sale.
3. Transfer the title and registration under your state's rules; your motor vehicle department lists what each side signs and files.
4. Protect the payment. Take a form of payment you can verify, such as a cashier's check confirmed with the issuing bank, before handing over the car or title, and meet somewhere public.

If you trade in instead, confirm the old loan really was paid off. The CFPB's advice: "Wait one week and contact the old lender to check that your previous loan has been paid off."

Which to choose

Trading in tends to make sense when the tax credit is large, the gap to a private price is small, or your time is worth more than the difference. Selling privately makes sense when the car is in demand, the gap is large, your state gives no credit, and you are willing to do the work. Either way, settle the next car's price separately from the trade-in, so a generous trade figure does not hide a high price; the car affordability calculator helps set that budget.

Sources: CFPB, Should I trade in my car if it's not paid off? (last reviewed 12 September 2023) and What is a loan-to-value ratio in an auto loan? (last reviewed 7 March 2024). Sales-tax treatment of trade-ins is set state by state. Figures computed with this site's own code.