How does a part exchange work?

Saving money on your next car is an opportunity anyone would take to ease such an expense.

The good thing is, if you already have a vehicle you’re looking to get rid of, then it might just help you save big.

Part exchanging your current car is an age-old practice when purchasing a new vehicle, and it’s really quite simple to do (most of the time).

For those inexperienced in part exchanging a car, here’s a rundown of everything you need to know.

How to part exchange a car

You’ll probably have noticed on a dealer forecourt many a second-hand car for sale – while some of them might have been bought especially for inventory, many of them will have come in on a part exchange.

In such an event, a customer will have come in to buy a new car to replace their old one and, like anyone who looks to get value for things, they’ll want to make sure they get something out of it.

This is where part exchange comes in – this car buyer can get their outgoing vehicle appraised to see how much it’s worth for trade-in, and then make it part of the deal to get a new car.

Whatever value they’re able to use from their old car can go towards the cost of its replacement by using it as their deposit, sometimes able to reduce its cost by thousands.

Part exchange working example:

• Have your outgoing car appraised by the dealer and get a valuation
  • Let’s say it gets valued at $7,500

• Find a car you want as its replacement
  • This new car has a price of $25,000

• Factor in the trade-in value to the deal
  • Subtract the $7,500 trade-in value from the $25,000 to get a final cost of $17,500

Part exchanging a car on finance

What’s important about the example above is, it’s based on you owning your outgoing car outright – if you still owe money on it, the process is a tiny bit different.

What’s ultimately important about part exchanging is that you need to have equity in the car to be able to save money.

If we stick with the same example, but this time there’s still $3,000 left to pay on the finance, then this would mean you’d have $4,500 equity in the car ($7,500-$3,000).

This is still a decent amount to put down on a new car, but it’s important to keep it in mind that what you still owe in finance could whittle down your equity quite easily.

If you’re thinking about part exchanging a car with finance on it, make sure to get a settlement figure from your finance provider ahead of a trade-in appraisal.

From the dealer’s point of view, they’ll be happy to pay off what’s left on the finance as part of the part exchange.

What happens if my outstanding finance is more than the car’s worth?

This isn’t a great position to be in, unfortunately.

Let’s say again that the car you wish to part exchange is worth $7,500 – but this time you owe $9,000 in finance still – you’d have what’s called negative equity, which in this case would be a $1,500 deficit.

This means that you’d not have any value to put towards a new car.

If you were to go ahead and part exchange the vehicle regardless, the $1,500 deficit would have to be absorbed into the deal – as a result, the new car would end up costing $1,500 more.

Can I part exchange my car for a cheaper vehicle?

This is a perfectly fine thing to do, and is something that would allow you to get a replacement vehicle plus some money in your pocket.

In such a case, you would go through the part exchange process as normal – but instead of needing to pay off the difference, the new car is fully paid off by the trade-in value and you’ll get any difference back in cash.

Obviously this is only the case for those who have fully paid off their car or it has the required equity.