An impartial survey of “most people I know” indicates that this is how most people part with their cars. They go to a new or used car dealership, and hand in the keys in exchange for money towards a newer car. I call this a lazy tax, because you are trading in time you would have spent selling the car yourself for quick money. But is is ever a good idea to trade-in a car?
First, you should understand what dealers do with Trade-Ins. Most people think the dealer simply resells the car on his lot, but you’ll rarely see you old trusty car sitting there on the lot. While sometimes dealers do this when they get a pristine model at a great price, more often than not, they put the car up on the auction block. This means that whatever price you are getting is LOWER than what a dealer can get at auction, which is already pretty much the cheapest way to get a car.
That said, dealers still don’t make a killing on trade-ins, and there is some risk involved with taking someone else’s car. Taking trade-ins for dealers is more than anything a way to keep you at their dealership and make a deal on selling you another car now. If you had to leave the lot to sell your car first, they know you may not come back. Dealers will sometimes even “up the value” of your trade-in to make you happy.
Beware though, essentially dealers are always juggling around numbers. They are there to make a profit, and there always has to be some profit margin. More value in the trade-in often means less knocked off the price of the car, or an added warranty elsewhere.
So back to the original question, when should you trade-in a car? The best answer is when the car is unsellable. This means there are obvious problems wrong with the car, such that the work performed on the car would cost more than the difference in the trade-in and private party value. For example, if you need a new transmission on your 1988 Chevy Cavalier, that may cost $1,000. The dealer is offering you $300 (basically scrap value) for your car, but the private party resell value of your car in good running condition is $500. Here it makes no sense to try to fix the car to sell it, and even if you could sell it as-is, the effort involved is probably more than the difference in value.
But in general this is a rare case for cars that are almost historic. I often see people trading in fairly new cars (less than 10 years old) because of a repair problem. It’s not uncommon for dealers to quote you a large service bill and suggest you trade-in to get a new one. Don’t fall for this. Usually the difference in a major repair is still less than the difference of a trade-in to private resell value.