Making Sense of the Trade In Allowance

Ialways encourage people with vehicles that they wish to trade in to do some meaningful research on the value prior to entering a dealership. Coming from a car salesman, does that statement surprise you? It shouldn't, because from my perspective, it is a lot easier for me to communicate with an informed customer. It seems to be human nature that most of us think, or at least we want to believe, that our vehicle is worth more than its actual cash value. However, one of the worst scenarios for me is dealing with a customer who has no clue what their trade-in is worth. If a customer has done some research, it is easier for us to communicate and discuss why there is a difference in their expectation and the reality of their trade-in vehicle's actual cash value.

I would encourage you to go online to either the Kelley Blue Book or NADA website, or both, and see how they evaluate your vehicle. When you do that, please read the fine print describing the criteria for the vehicle condition, and be honest in your selection of the condition. Make sure that you enter the miles accurately, as well as trim level, options, etc. If your vehicle has been in a accident, if it has had the odometer replaced or a malfunctioning odometer, or any other reason to brand the title, then the book values are irrelevant.

The books, such as Kelley Blue Book and NADA, are excellent guides, but one must understand where the data comes from in order to make sense of their relevance. The trade-in value in those guides is not necessarily the same as your vehicle's Actual Cash Value (ACV). ACV, also referred to as "hard money", is the amount that the dealer is really paying you for your vehicle, just as if you were selling it to the dealer without buying another vehicle.

The data upon which book values are based is a compilation of retail transactions reported by automobile dealers across the country. If you read the section on this site about Salesperson Compensation, you might remember my reference to the "nut and shell game" with the trade-in value. The technical term for this is overallowance, where the customer is shown a "trade-in allowance" or "trade-in value" that is taken off an inflated retail price on the vehicle they are purchasing, rather than being shown the actual cash value (ACV) of the trade-in or the real discounted selling price of the vehicle that they are purchasing. There are relatively few one price, or Only Price, dealers nationwide, therefore the numbers in this database are skewed toward overallowance transactions. Here is an example illustrating how this works:

The customer is interested in purchasing a used vehicle with a book retail value of $22,000, that, unbeknown to him, the dealership is willing to sell at $19,800. The customer has told the salesperson that he has researched both the vehicle that he is interested in buying and his trade-in, and that he expects to pay no more than book value for the new vehicle, and he expects to get at least book value for his trade-in. The salesperson has the customer's vehicle appraised, and the Used Car Manager calls the trade at an ACV of $6,000. The books show a trade-in value of $7,500.

Given the same scenario, except that the dealership is an Only Price Store, here is how the numbers would look.

Most likely, the customer would object to the trade-in value being so much lower than the book value, but that is because he is being shown the real numbers instead of some overallowance nut and shell game. Now, let's look at the two deals side by side:

The difference price is the most important number, but too often, especially when comparing the offering of one dealer against another, the customer focuses on the trade-in value instead of the difference price, and misses out on a truly good deal.

There are many factors affecting the used car market, and the guide books, by the nature of the manner in which data is gathered, do not quickly reflect market trends. For example, when fuel prices rose sharply from $2/gallon to over $3/gallon, the value of used full size trucks and SUV's took a sharp dive. The books did not reflect that sharp decline in the actual value, therefore consumers could buy late model full size trucks and SUV's way below book because the supply vastly outweighed the demand. On the other hand, people trading them in were getting no where near the book trade-in value because dealers knew that these vehicles would have to be sold way below retail. I'll discuss this in greater detail in the section on Buying a Used Car.