What's the catch of a car trade-in?

October 12, 2021 11:07 AM

I have a 2019 Crosstrek that I'm financing and am pretty happy with. The dealership just sent me an offer for a 2021, trading in my 2019, for a significantly lower monthly payment. There's obviously more to investigate and calc here (loan duration resets to 0, were there add-ons for my current car that aren't in the trade-in, actual offer after credit check, etc) but I'm wondering what some unexpected downsides might be to trading in in a pretty-new car.
posted by curious nu to Travel & Transportation (17 answers total)

One *massive* catch is that whenever you buy a new car, you throw away many thousands of dollars the second you drive it off the lot.

The another, equally massive catch is that a lower monthly payment can mask a higher interest rate and a higher total cost to you. You need to know all the terms and conditions of the loan.

Finally - not to make negative generalizations about car dealerships, but ask yourself why they're doing this? The short answer is "because they can make money" and that money is coming from you.

Given the expected longevity of modern cars, a 2019 model is basically new. I'd not take this deal. (Although I don't buy things on credit, period.)
posted by buxtonbluecat at 11:20 AM on October 12, 2021 [7 favorites]

Instead of looking at is as a trade in - vs a newer car, think about it in two separate transactions.

Dealers like to lump them together, but if you ask, they will tell you what they are valuing your trade in at. You can decide for yourself if that is a good price to sell your car for. And, figure out what the cost of the new car is. You can decide if that's a good price to buy a car for.

Trading in a car (or phone or anything) can be a good idea, or can be a bad idea. But, in general, thinking about it in terms of payment usually clouds the decision, as opposed to absolute numbers.

BUT - I definitely do suggest using car loans, in general. You'll never get cheaper money. Take the cash you could use for a car and put it into investments to come out ahead!
posted by bbqturtle at 11:33 AM on October 12, 2021 [7 favorites]

We're still in a severe supply shortage for new cars, especially popular makes like Subarus, so perhaps you need to find out why this 2021 model is still available. Is it a loaner or demo vehicle they're trying to unload? How many miles on it? Is it a used '21 that came back on a similar swap and the dealer is trying to squeeze some cash out of it?
posted by JoeZydeco at 11:34 AM on October 12, 2021 [4 favorites]

I would hazard a guess that the trade-in value they're giving is not competitive, so while they can do it to keep you on a payment plan for two years longer than you would have before, they can still make money on the exchange.

Just for made-up, back-of-napkin purposes:

2019 Crosstrek: $25K
Paid to date: $5K
Trade-in value towards 2021 Crosstrek: $15K
Dealer sells your 2019 Crosstrek: $20K

So they make money on the margin there, while you are still paying full price for a new car.

I don't think it's a rotten deal but they definitely stand to gain by it and as far as I can see unless you have ridden the 2019 hard, you don't gain much by it unless the new terms are truly better. In which case you can weigh those against the idea of putting off full ownership of the car by 2 years.

(on preview, what bbqturtle said as well)
posted by BlackLeotardFront at 11:35 AM on October 12, 2021 [2 favorites]

The catch is that they think they can make more money selling it than they'll give you for it plus it hooks you on a new car. They can do this in part because they have mechanics on staff so any repairs it needs they can do cheaper than you and that a certified used car from a dealer can command a premium compared to a private seller, so it's not always a rip-off, just leveraging their position.

whenever you buy a new car, you throw away many thousands of dollars the second you drive it off the lot.

This is less true with Subarus, even before covid. When I bought a new Subaru 3.5 years ago, I looked at used, but I would have only saved about $2K for a 2 year old car with 20K+ miles which to me was a really bad trade-off. They hold their value stupidly well.
posted by Candleman at 12:10 PM on October 12, 2021

As a general rule, anyone who's advertising by monthly payments is hiding the overall, real cost.

This is very true of cars in general, and was a big effect in the 2007 housing crisis.

It could in theory work out in your favor in this crazy market where resale values are so high, but likely not. There are dozens of "gotcha" points in the transaction where they can hide their profits and the total cost from you, and the only way you'll know is by computing your total costs yourself.
posted by Dashy at 12:16 PM on October 12, 2021 [5 favorites]

One of the catches with trading a working 2019 car for a brand new, otherwise nearly identical 2021 car is that it creates demand for new cars.

The planet is warming, if we don't change the trajectory we're on then things are going to get extremely bad, and the manufacture of new cars produces a huge amount of greenhouse gases even if they are never driven.
posted by caek at 12:20 PM on October 12, 2021 [7 favorites]

whenever you buy a new car, you throw away many thousands of dollars the second you drive it off the lot.

Normally I'd agree. But my car tax this year had a note saying that "usually used car prices go down ever year so your taxes go down, but this year a few used cars actually went up in value and as such the taxes also went up." I'd say that there's a market for your car's year and the dealer knows they can make money off that year more than say a 2021.
posted by 922257033c4a0f3cecdbd819a46d626999d1af4a at 12:46 PM on October 12, 2021 [1 favorite]

Another 2019 Crosstrek owner here, whose dealer is similarly interested in putting me in a new one so they can sell my old one. It's tempting—I was tempted for sure—but it's an unwise idea for the reasons already outlined here.
posted by emelenjr at 1:15 PM on October 12, 2021

The short answer is if they are a typical car dealer: don't waste your time.

I received a similar offer a few years ago that was tempting, but when I went into the dealer, the original trade-in "offer" began to slowly slip downwards as they nickel and dimed me for every single thing they could make up. One of your tires has a touch of curb rash? $500 off. A slight scratch on your bumper? Another $500 off.

By the time I figured out the game, they had wasted two hours of my time, at one point basically holding my car "hostage" as they were trying to convince me to sell at their price. In fact, the entire experience was so distasteful and sleazy that I decided never to take my car there for service or do business with them again.
posted by jeremias at 2:41 PM on October 12, 2021 [8 favorites]

Those dealer come ons are always a scam. They wouldn’t do it if they weren’t making money off you taking that depreciation hit. Don’t be tempted. It’s counting on you not doing the math.

There is no such thing as an honest car dealer.
posted by spitbull at 2:41 PM on October 12, 2021

Response by poster: Thanks everyone. :) It certainly seemed too good to be true so I was curious about what some of the actual pitfalls were (besides gut feeling). Appreciate all the answers!
posted by curious nu at 2:51 PM on October 12, 2021

Depends on your state, but I suspect you will pay full sales tax on your new car (~$1800.00?).
posted by H21 at 3:32 PM on October 12, 2021 [1 favorite]

FWIW, I bought a Subaru in 2002 that was (initially) dealer-financed, and I received the same come-on from my dealer as well. Obviously they're coming out ahead on this or they wouldn't be doing it—I never bothered to do the math beyond that. At a minimum, I assume they want to keep you making monthly payments indefinitely by getting you to keep churning cars.

With my current car, which is not dealer-financed, I have not received these come-ons.
posted by adamrice at 4:23 PM on October 12, 2021 [1 favorite]

Car dealerships, and car salesmen, are slime. You should not trust anything they say. They play a shell game with you by manipulating terms so that whatever terms you’re focused on (interest rate, trade in value, etc) look very good but they make up for it by manipulating the variables you’re not focused on. You need to consider every aspect of the deal and determine whether it’s fair to you. You also need to scrutinize the contract when they present it because they can and will change things assuming you won’t read it. Assume you’re dealing with amoral liars, because you are.
posted by mattholomew at 6:13 PM on October 12, 2021

I don't hold car dealers in high regard, but just because they are making money on a deal does not necessarily mean it is not a good deal for you too. The above advice to look at it as two transactions is spot on. Then, look at the total of the two deals too. If it were me, I would go into the dealer, tell them you stopped by on the way to an appointment and need to leave in 20 minutes, hard stop, and ask them to explain the deal so you can think about it at home. See if they will put the terms in writing so you can evaluate it. Maybe it makes sense, maybe it does not.
posted by AugustWest at 1:15 AM on October 13, 2021

Car dealer doesn't do that UNLESS they're going to make money off of you. The question here is... can you benefit from this? And my answer to that is... Unlikely.

Unless manufacturer is offering super-low-interest financing that's MUCH lower than your current loan's APR, there's no reason to swap. Dealer probably extended the loan length to lower the monthly payments. They are seriously doing 60, or even 72-month payment plans nowadays.

And they are very likely to bait and switch on you, i.e. "only X cars available for this deal" and none are available for you.

You basically need to know the exact numbers they are willing to offer you to swap your loan to a new vehicle, WITHOUT extending the loan length and are they giving you a fair deal on top of the equity you've accumulated in the "old" vehicle.

For example, let's say you took out a 30K loan for the car. And so far, couple years in, you got 10K equity in the car, with 20K left to go. The car now, being hot in the market, is worth 25K. So you are net positive. Hypothetically, someone could buy this car off you for $5K to you and $20K to the bank.

But let's say you want to trade this in for a new one, and this is also 30K. The dealer is NOT going to give you 25K for the car, as they need to make a profit. They may give you 20K. Since you owe 20K, you get nothing to yourself.

Now, you're back at owing 30K for a car with $0 equity. What you got is a slightly newer vehicle with factory warranty and new car smell.
posted by kschang at 5:07 AM on October 13, 2021 [2 favorites]