Car Corner
Should You Trade-in or Sell Your Car

November 1, 2007
By Scott Lewis

Last month I looked at some used cars for around $35K. It lead me to wonder about trading in a car when you buying a car. This is going to be a money article. I want to take a real world example of buying a new car and explore the options of trading in or selling the old car.

People always wonder if it is really worth it to sell your car privately. But the "worth it" is always hung on the hassles of selling the car. Everyone assumes they could sell there car for more than a dealer would give them for it as a trade. In fact NADA and Kelley Blue Book both list trade-in, private sale and retail prices. The idea being that you should get the trade-in value if you just give the car to the dealer when buying a car from them. The retail price would be the price the dealer turns around and sells your car for. Obviously the private sale price is what you should be able to get if you skipped the dealer. In this case the buyer would make his own arrangements for financing and you would deal with the phone calls and visits to show the car. In the end the buyer saves money and the seller gets more for his old car. A win-win situation. Or is it?

Most people never factor in the sales tax when making this monetary decision. O.K. All you readers in New Hampshire can stop reading... you win as there is no sales tax in your state. For the rest of us, how much does sales tax effect this transaction?

The key here is that when you trade in your old car you only pay sales tax for the difference between the new car price and the amount you get for your trade. When you sell your car separately from the new car transaction you have to pay sales tax on the entire purchase price of the new car.

The question becomes, will you be able to sell your car for a large enough amount (above what a dealer would give on trade) to justify the tax break?

For this article I used Kelly Blue Book for all pricing of the old car. This eliminates negotiations from the equation. It is common for dealers to give more for a trade, and in turn charge more for the new car, or lower the price of the car while lowering the offer for the trade. I wanted to use concrete numbers without bias. I looked up trade-in and private sale values for my own 2006 Mini Cooper S Convertible.

I needed a car to buy, and a price point to hit. Keep in mind that the price of the new car has nothing to do with this. It is all about the difference in what you get for your old car. But I wanted to have fun, so I priced a 2008 BMW 335i coupe on BMW's web site with an MSRP of $45,875. I used the MSRP of this new car in my calculations.

Note: All data collected for this article was done on 9/19/07, include the sales tax rate in San Antonio of 8.12%.

Let's see the numbers:

2006 Mini Cooper S Convertible Value:

Trade In Value for Excellent condition:         $24,075
Private Party Value for Excellent condition:    $26,615
Difference:                                      $2,540

With a difference between trade-in and selling of $2,540 we need to see if the difference in sales tax will be more than that Let's first look at the typical trade-in and see what the bottom line of price you pay for the car (which in this scenario would be the amount you would have to finance):

New Car Price         $45,875
Trade In Value        $24,075
Sub-Total             $21,800
Sales Tax              $1,770
Amount to Finance     $23,570

Following traditional trade-in practice we have a final cost of $23,570. Now lets look at what we end up paying if we sell our car privately.

New Car Price         $45,875
Sales Tax              $3,725
Sub-Total             $49,600
Private Sale Price    $26,615
Amount to Finance     $22,985

Now we have it, we managed to reduce the final out of pocket expense by a whopping $585.


The question is not, "is it worth the hassle of selling your car privately to save $2,540, the difference in the money you get for you old car." The question becomes, "is it worth the hassle of selling your car privately for $585."

Some of you may be saying that my example may not relate to you. I beg to differ. Regardless of the price of the new car, we are always looking at the difference you get for your trade vs. selling it yourself, and the difference in sales tax on the purchase. You can do the same thing if you want, with any car purchase. In fact, because the government insists on charging sales tax each time a car is sold and resold (a serious pet peeve of mine) you can do this same experiment when buying a used car.

It really boils down to how much your trade is worth. At the high end of the scale there is a big difference in dollars between selling and trading, but at the low end the difference is smaller so the issue is smaller.

Bottom line is we are only talking about a few hundred dollars, not a few thousand dollars. If you sell it privately you have to account for the cost of advertising your car for sale, dealing with paperwork, and listening to every telemarketer and their grandmother tell you they can get you top dollar for your car.

If you are buying a car from a dealer there is far too little financial incentive to sell your car privately. The hassles will surely out way a few hundred dollars. Then there is the ease of turning over your car to the dealer, the single point of paperwork, etc., etc.

Trade in your car when you buy a new one. It's that simple.