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October 24th, 1999 Article
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This week I am going to get myself in trouble again by giving you a "GENERAL" over view of trading in a vehicle. First I would like to remind you that business's MUST make money car businesses are no different than any other business. A grocery store buys food items, puts a mark-up on the price and then sells the items to make money in order to stay in business. When you trade your vehicle in on another vehicle, you are really SELLING your vehicle to the dealer. The dealer MUST buy your vehicle at a cheap enough price that they can sell it AND MAKE A PROFIT. Every vehicle sold has a trade in value built into the price, to allow for a trade. I will give a GENERAL view for example purposes ONLY. (Do not use these percentages as a rule because they are only used to simplify the explanation.) Lets say that a dealer has a car that they paid $10,000 for and they need to make a 25% "MARK UP" to be able to stay in business. This would now become a $12,500 price tag.

However, they know that the majority of people prefer to trade in their old vehicle and they also know that the major reason people trade off a vehicle is because it requires some repairs that the owner does not wish to deal with. In other words, the dealer knows that they are going to have to spend some money on the vehicle that is being traded in. So in order to have some room to work, they put a trade in allowance on the above vehicle of 20% and the asking price now becomes $15,000. Now, in you come with your vehicle to trade off and we are going to look at how a DEAL is made. You are driving a vehicle that would NORMALLY sell for $5000 but for the dealer to be able to sell your car for $5000 and MAKE a profit, they must BUY it from you for less than that amount, RIGHT?

In a PERFECT situation, they just take the trade in allowance off the price of the above vehicle, (The $2,500.) and they add it to your BASIC value of your vehicle and they tell you that they need $10,000 difference. (They are really only giving you $2,500 for your trade.) This looks like a good deal because they are showing your trade in as being $5000 and you are happy.

However, this is NOT a good deal for the dealer and this situation would NOT buy you the car. Remember I said that the dealer had to make a 25% MARK UP? I know what you are thinking, the dealer took your car on trade for $2,500 and you paid $10,000 difference so the dealers profit is in what they will make when they sell your car. However, this DID NOT make them any money on the car they just sold as their profit is tied up in a car that might sit on their lot for months before it is sold. Plus they might have to do a complete clean-up, ($300) a brake job, ($400) new struts, ($300) four new tires, ($400) and they have to pay a lot person to wash that vehicle every week until it is sold. Buy the time they sell your old car, they will have spent more than $2000 on that car, so it has COST them $4,500 and in order to make that 25% MARK UP, they would have to sell your car for $5,625. (Not a chance.) So in order to get a deal here, you would have to be willing to accept about $4000 for your car on trade and paid $11,000 difference. Now is where we get to the neat part.

You could of bought the above vehicle out-right for $12,500 and kept your old car to sell yourself. If you could sell your old car for anything more than $1,500 dollars, you would be further ahead RIGHT? The bottom line is, can you afford the time and money to deal with selling your old car? That is why most people just prefer to trade them in as it is more convenient. If you choose to trade in, just remember that you must allow the dealer the ability to make his required profit or it will be NO DEAL.

Next week, tips to increase your trade in value.

"TOOT" Rick "The Wrench" - October 24, 1999
Copyright of Rick The Wrench, 1999

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