Okay, so you have an idea of what new car you want and how you are going to pay for it (I hope!). Sounds like all you have to do is test drive it and sign at the bottom line. But what are you going to do with your current set of wheels? Yeah, you're going to have to do something about that old rust-bucket. The good news is that there are two methods of parlaying the equity of your current car towards your new one — selling and trading in.

Selling Your Car

Let's get one thing straight. Selling your car to a private buyer can net you hundreds if not thousands of dollars over trading it in. When you trade your car into the dealership you are only receiving wholesale value, because the dealer has to incur costs to prep the car for sale, keep it on the lot, etc. If you have the time and patience, selling your car yourself is a worthwhile venture. Individual buyers won't dock for dents and scratches as much as the dealer will. Our friends at Cars.com can help you sell it yourself by advertising your trade in on their listings, which are browsed by thousands upon thousands of used car shoppers every day.

Trading in Your Car

If you aren't concerned about keeping more money in your pocket, or if you're too busy to deal with the sell-it-yourself process, you can trade in your car to your new car dealer. Note that you'll likely get a better trade-in price for your car if you're trading it in to a dealer that sells that make. In other words, you'll likely get more money for your Volvo from a Volvo dealer than if you traded it in to a Nissan dealer. One important note: manufacturers will sometimes offer incentives on your trade-in, including extra cash, so do some research to see if any of those apply to your set of wheels.

Don't Turn Upside Down

A common mistake people make is trading in their car while being upside down with their payments. Being upside down means that you owe more money on your current car than it's worth. If your car is worth $8,000 and you owe $12,000, you are upside down by $4,000. Trying to buy a new car while being upside down on your current car is a terrible, terrible mistake. If you are upside down $4,000 and the car you want is $20,000, you are adding $4,000 to your loan. This will make you even more upside down in your new car – leading to a never-ending downward spiral of debt. It makes more sense to get caught up on your payments so that you're at least on level ground (and preferably far ahead) before you buy a new car.

The Upside Down Exception

The only time that you can get away with trading in your car while you're upside down is when the new car that you wish to buy offers significant cash rebates that completely offset the amount you're upside down. For example, if you're upside down $1,500 and the new car has a $2,000 rebate, you come out $500 on the plus side.

Prep it

Whether you decide to sell your car on your own or trade it in, make sure that your car is in the best shape possible. If you're a smoker, grab the Febreze, and start airing your car out. Make sure that it is totally clean — inside and out. Perhaps spending a little to get it detailed would help as well, first impressions count!

Finding the Value of Your Used Car

Many sellers estimate the value of their used car before selling it or trading it in. We suggest you use our Appraisal Guide to gauge the value of your vehicle.

As you use the Appraisal Guide, be completely honest when estimating the condition of your car. There is nothing more embarrassing than negotiating a trade-in price and having the dealer point out that you've misrepresented the vehicle's condition. Make sure to take your printed appraisal form with you to the dealership (along with the Internet Price Quote). That tells the dealer you've done your homework and makes negotiation a breeze.

THIS IS THE MOST IMPORTANT PART

Once you are at the dealership ready to buy your new car, DO NOT mention that you intend to trade your car in to the dealer until you have finished negotiating the new car price. This way, there's no confusion and you can negotiate both your best price for the new car and the best deal for the trade-in separately. If the dealer asks if you plan on trading in your car, do not say yes or no, just say “Possibly, but let's just talk about the new car price first.”

How you want to approach the trade-in/new car purchase:

1. Conclude what the cost of the new car is.
2. Conclude what the trade-in value is worth.
3. Calculate the difference between the new car and the trade-in price. Add any rebates/incentives and down payment cash. Once you've found the difference, you can map out your monthly payments.

How the dealer makes money off of your trade-in:

The dealer is looking to make a profit at every turn during the car buying experience. Know that he wants to buy your trade-in at the lowest price he can (wholesale) and then sell it for a mark-up. If you don't have a clue what the value of your trade-in is before you visit the dealer, you will not get a fair price for it.

Keep in mind, however, that there are legitimate costs involved for the dealer in buying your trade-in. They have to fix any significant cosmetic or mechanical problems as well as replace certain parts before reselling your car to a used car buyer. They also needs to pay commission to the used-car salesperson and pay rent on the used-car sales lot. In addition, they have to pay to advertise the car, and have money tied up in it until it is sold.

NOTE: If you owe money on your car and you wish to trade it in, know that you won't get much of a return. If you owe $8,000 on your current car and the dealer gives you $9,000, you'll only be able to apply $1,000 to your new car down payment.

TIP: Do your homework first and get a used car valuation from NewCars. Take the printouts of your trade-in valuations to the dealer. If you have any questions with the negotiation you can refer to your paperwork for help.

BOTTOM LINE:

In order to get the best value for your trade-in, sell it to a private buyer. If you don't have the time to do that, get several quotes — both online and through used car dealers. Trading your car in to the dealer is the easiest way, but not the most cost-effective. Getting the maximum value for your car will help take the sting off of the price of your new car.