How do used vehicle exchange programs at car dealerships work?

Question

I've gotten numerous offers from car dealers in the past to trade in my used vehicle for a new or a [newer] pre-owned vehicle "while keeping my monthly payments the same." They also say that I can trade up for no out of pocket expense.

This seems like they would have to simply give people a really long term on the loan in order to finance the higher value. (More payments...more interest overall.) Can anyone with experience explain how this kind of deal works? Something tells me it's not in my best interests.

Answer 1

You are correct to be wary. Car dealerships make money selling cars, and use many tactics and advertisements to entice you to come into their showroom.

"We are in desperate need of [insert your make, model, year and color]! We have several people who want that exact car you have! Come in and sell it to us and buy a new car at a great price! We'll give you so much money on your trade in!"

In reality, they play a shell game and have you focus on your monthly payment. By extending the loan to 4 or 5 years (or longer), they can make your monthly payment lower, sure, but the total amount paid is much higher.

You're right: it's not in your best interest. Buy a car and drive it into the ground. Being free of car payments is a luxury!

Answer 2

Yikes! Not always is this the case... For example, you purchased a new car with an interest rate of 5-6%or even higher... Why pay that much interest throughout the loan. Sometimes trading in the vehicle at a lower rate will get you a lower or sometimes the same payment even with an upgraded (newer/safer technology) design. The trade off? When going from New to New, the car may depreciate faster than what you would save from the interest savings on a new loan. Sometimes the tactics used to get you back to the dealership could be a little harsh, but if you do your research long before you inquire, you may come out on the winning end. Look at what you're paying in interest and consider it a "re-finance" of your car but taking advantage of the manufacturer's low apr special to off-set the costs.

Answer 3

Not only might your interest rate go down but you may qualify for a manufacturer incentive that could save you $2000 or more on the new vehicle. These monies can effectively lower your loan amount and actually save you money on your monthly payment. Dealers want to sell you a new car, but the manufacturers actually want it more, and will often pay you to do the trade-in.