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Trade In? Maybe Don't

Economists find that trading in a used car bumps up the price of the new one you take home—by a lot.
(Photo: David B. Gleason/Flickr)

(Photo: David B. Gleason/Flickr)

Car dealers love trade ins, or so it appears based on advertisements, but they're likely the only ones who benefit. Turns out, trading in your used car for a new one could drive up the price you pay by around a thousand bucks on average.

"Consumers tend to underestimate the consequences of their decision to trade in a used car," Concordia University marketing professor Ohjin Kwon writes in an email. Trading in a car hands dealers valuable information about a buyer's preferences, Kwon and colleagues at the University of Southern California and the University of California-Riverside explain in a new study.

It's not like economists and psychologists haven't studied the particulars of car buying and trade ins before. But, Kwon and team argue, past studies missed a few important points.

New-car buyers who traded in their old cars paid $990 more on average than others.

For one, when someone brings in a used car to trade in, that sends a signal to a dealer: they don't want to deal with selling it themselves, so they're probably willing to pay a little extra for a new car to avoid the hassle, compared with someone who's willing to sell an old beater on their own.

Second, the make and model of a buyer's old car sends a signal about how much they'll be willing to pay for a new one. If you want to get a new Honda Accord, for example, and want to trade in an old Honda Civic, probably you're happy with the brand and will pay a bit more for the Accord than somebody who brings in a Chrysler or a Ford.

Kwon and colleagues turned those ideas into a mathematical model of how car trade ins work, but perhaps most interesting is the researchers' empirical analysis of 169,759 new premium mid-size car purchases—think Accords, Camrys, and Passats—in Southern California between 2001 and 2005. That analysis revealed that new-car buyers who traded in their old cars paid $990 more on average than others.

There's an even bigger premium when it comes to trading in a car simply for a newer version. On top of the $990 traders are already paying, a buyer seeking a car of the same make pays an additional $150, and another $64 if the new and old models match. In other words, trading in your old Corolla for a new one will, on average, cost you $1,264 more.

Whether it's worthwhile to trade in your old car is another matter. That calculus depends on how much more you could get for the car you own if you sold it yourself, and, maybe more importantly, how much stomach you've got for finding some weirdo on Craigslist who wants to buy that jalopy.

"Thus, consumers may want to avoid trading in a used car," Kwon writes. "Or, they should consider hiding from the dealer that they have a trade-in" until after settling on the new car's price.

Quick Studies is an award-winning series that sheds light on new research and discoveries that change the way we look at the world.