Should you trade in your car?

Here’s a scenario that car shoppers face every day… You are in the market for a new car because your want to upgrade. There’s nothing particularly wrong with your current vehicle, but you are convinced that you’ve been driving this old car for long enough and don’t want to end up with an unreliable money-pit. So, you do your shopping, find your dream car and then, you have to make a decision. What to do with the old car? Do you: 1. Trade it in to offset the new purchase2. Sell it in a private transaction3. Keep it; perhaps for a winter beater.

The decision only gets tougher when the existing vehicle is complimentary to the new purchase. For example, you have a pickup truck or an SUV and want to buy a sporty convertible. Or, inversely, you are in the market for a truck, but have an economy car that you can use for in-town commuting. No question, having two vehicles is convenient, but what about financial implications? First there’s a matter of depreciation on your current vehicle. Even though it’s not costing you any more money per-say, the money that’s tied in this vehicle could be used somewhere else (also known as opportunity cost). Then there are insurance premiums, annual licensing fees, maintenance costs and parking space issues.
Let’s examine these options in more details:

Option #1

Trading your car in definitely makes a lot of sense. Besides eliminating above-stated costs, a trade-in can reduce the taxable amount of the new purchase. For example, if you can reduce your new purchase price by $5,000, depending on state taxes that can yield an additional $300-$500 in tax savings. You also save on financing, since the amount financed is reduced. On a four year loan, that can equate to an additional $1500. So, in addition to the $5,000 your dealer will knock off your new purchase, you can also get up to $2,000 in intangible savings.

Option #2

Private sale can bring you a bit more money as dealers have to make their margins. However, besides losing benefits of a trade in, also consider: showing hassles, advertising costs, and possible post-sale problems. The upfront gains may very well be a wash in the end, leaving you with just a big headache.

Option #3

There are indeed some financial benefits in keeping the old car. Depending on how many vehicles you have in the family, there may be insurance benefits to have more than one vehicle. Assuming the old car is paid off, there’s no need to keep full (comprehensive) insurance on the old vehicle. Therefore, having an inexpensively ensured primary vehicle and a fully-insured secondary vehicle, may be even cheaper than paying full price for one. Also, by alternating between the two vehicles, you are reducing the drivable mileage, which may influence your financing decision (i.e. leasing) or result in less depreciation on your purchased vehicle.
For me, the trade-in is a no-brainer, at least financially. However, if you do decide that the financial premium are worth the convenience of multiple vehicles, there are ways to better your position. What are your thoughts on this subject? Tell us about your experience.