Trade allowance. Trade difference. Actual cash value. Replacement value. Anticipate market change. Stealing a trade. Trade stretching.
These are all terms that dealerships use. They are not made up or designed to rip off the customer, but an informed consumer can use this information to make a better deal for themselves.
The most complex aspect of buying a vehicle from a dealership is working with the trade in. Despite most consumers’ best efforts, it’s often difficult to get a straight answer to the question, “How much for yours, and how much for mine?”
It usually isn’t an attempt by car dealers to be obtuse or really “stick it” to the customer. In truth, most consumers would laugh if they knew how much the dealership is actually giving them for their trade.
There is “Actual Cash Value” and there is “Trade Allowance”. Most dealers submit trade allowance for review when negotiating with customers because not getting enough for a trade-in is the most common reason for someone to walk away from a car deal.
Actual cash value (ACV) is just as it sounds. All things being equal, if the dealership were to stroke a check for a vehicle without selling one back to the customer, this is the amount that the dealer is putting into the vehicle. It is often the same as replacement value (how much it would cost to pick up a similar vehicle wholesale or at an auction) but not always. There are other factors, but for this article, just the basics.
Trade allowance is ACV plus profit reduction from the cost of the vehicle the auto dealer is selling. They aren’t “giving” that much for the trade-in, but they are “showing” that much in the trade-in.
For example, let’s say the dealership is has an asking price of $20,000 on a GMC 1500. This dealership actually owns the truck for $17,500. They place an ACV of $9,000 on the trade in.
After some back and forth negotiating, they offer $10,000 for the trade and take $500 off of theirs. That would be $19,500 minus $10,000 for a trade difference of $9,500. The consumer may like this deal.
In reality, they are still only putting $9,000 in the trade and taking $1,500 off of theirs, yielding a profit of $1,000. But if they present the numbers as $18,500 for theirs and $9,000 for the trade, the consumer is more likely to walk away from the deal, even though the trade difference is still the same.
The reason: people want more for their trade than what the dealership really wants to put into it. By believing they are getting $10,000 for the trade and a modest discount on the truck, they are more inclined to pull the trigger.
It isn’t some evil dealership scam. It’s simply adjusting to the buying habits and preferences of the consumers. Still, there is a way to find the true value of a trade.
Every city has a handful of dealerships that buy vehicles off of consumers. Carmax is spreading rapidly across the US, plus establish independent dealers such as Oklahoma City Ford Trucks still make cash offers for vehicles.
If a consumer prefers to get a ballpark via the internet versus having to go to an appraisal, they shouldn’t check with car value sites such as Edmunds or Kelley Blue Book. While these are excellent resources for new cars, they are often inflated on their used car values.
Consumers should find out what vehicles similar to theirs are actually selling for. Used car sites such as Memphis Used Cars have databases. Whatever dealers are selling theirs for, deduct $2,000-$4,000 for vehicles under $30,000 to get a ballpark of what dealerships are actually putting into vehicles.
Use this information when negotiating. Many sites and articles recommend holding the trade in information as a secret until later in the deal. This is pointless, wastes time, and is counterproductive to getting the best deal.
It may make the numbers more accurate, since a dealership will be more inclined to offer their true best price on a vehicle if there is no trade to account for, but it won’t help save money. Once the trade is presented, the numbers on it will simply be lower than if it was presented originally. In fact, the wasting of time and displaying dishonesty in the negotiations can actually hurt the value.
Be upfront, but have the knowledge of the trade-value handy. If you know someone will stroke a check for $10,000 and the dealership with your next vehicle offers $9,500, pull the trade out of the equation, sell your car, then buy the new one without trading. It’s simple.