Are you the type of buyer who always trades in your old car on a newer one? Better yet, are you the type who sells your old car outright rather than trading it in? Well listen up: Whether you plan to trade your present vehicle or sell it outright, you could lose thousands if you don't understand the seismic changes that have taken place in the auto business in the past 24 months.

The used car
you're driving now
doesn't have an
"invoice cost"
like a new car.
The old battleground for profit:
For years, sellers made their biggest profit on the sale of a new car. But the profits on the sale of that new car have been tumbling as the consumer's awareness of the actual cost of new vehicles kept rising.

Today, any consumer can find to the penny what a new car cost the dealer—and even find out what "hidden" profits dealers may be making. Consumer Reports, for instance, offers an online invoicing service for $15.00 that tells the "invoice" cost of a car, and then details dealer holdbacks and incentives on that specific car.

Many dealers offer "invoice" pricing, too. Even the National Automobile Dealer Association has a Web site where dealerships post copies of invoices for vehicles sitting on their lots. Armed with a copy of an invoice, even the most inexperienced buyers could see what profit they were paying to a dealer on a new vehicle. Ergo, the dealer's profit per new vehicle sold dropped precipitously as consumers began to negotiate up from "cost" rather than negotiating down from "asking price."

The new battleground for profit:
Car people naturally didn't like this turn of events. That's why, virtually to a seller, everybody in the car business decided to quit focusing on the profit they made on the sale of the new car and focus on the profit they can make on your old car. And, believe me, the profits are enormous, and many times these profits come from your pocket.

Why car people love your old car:
The used car you're driving right now doesn't have an "invoice cost" like a new car. It's therefore hard for you to pin down its true value. But car people easily can determine that value, called "wholesale value." Wholesale value is the amount of money a person or company will pay for your car when intending to resell it at a higher, or retail, price. Wholesale value is a standard business term used in the auto business. It's the figure "on the books" for every used car at every used car seller's office.

The trick:
The goal of car people is simple, and deadly for your pocketbook—to determine your old car's true wholesale value, then give you less than its wholesale value. The trick is called "lowballing" or "underallowing" and here's how it works. An appraiser determines that your old car is worth $5,000 and lists it as an asset on his company's books at $5,000—but the appraiser only gives you $4,000 for it. In a blink, you just lost $1,000. Underallowing has become so common in the auto business that the initials O.A/U.A—for overallowed/underallowed—are printed on the internal documents (the ones you don't see) of virtually every used car trade-in in America. And that includes vehicles traded in at dealerships or on the Web.

The Internet makes the problem worse:
Of course you don't observe this extreme interest in lowballing your trade-in. Dealerships and most particularly Web sites are doing their best to convince you that your old car is incidental to the whole auto transaction, a bothersome detail. That's why even the most reputable online car operations use phrases similar to these when they mention your old car: "We'll be happy as a courtesy to handle trading in your old vehicle;" or "Our affiliated partners will be happy to take your old car off your hands;" or (my favorite) "We'll send a person to your home to assist you in disposing of your old vehicle." They imply, Why should you worry about your trade?

And you'll never hear the word "wholesale" from any of these folks, either. They completely avoid the phrase "wholesale value" when they mention your trade-in-even though they know its wholesale value. Instead they talk about your old vehicle's "suggested value" or "market value" or "trade-in value."

How to stop the "lowball" before it happens:
You have absolutely no defense against lowballing other than determining your old car's true wholesale value before you let any dealership or buying service appraise it. "Black books" or other used-car appraisal books can't tell you its real value; books provide only average prices of vehicles like yours. Online "appraisal" services can't tell you its real value, either. All of these services give you estimates, not buying prices.

There's an old saying in the car business that sums up why books don't work for determining value, and this saying goes for online services, too: "Books can't write checks; only people write checks." In other words, your old car is only worth what someone will pay for that specific car right now in a specific market.

Your only defense
against lowballing
is to determine
your old car's
true wholesale value
before you let
anyone else
appraise it.

Determining your old car's true wholesale value:
This process takes a little time, but it honestly can make you a couple of thousand dollars. Make your old car look new. Then drive it to at least three used-car operations near you. If you have a CarMax or other national used-car chain, go to one; choose another operation that sells new cars like your old one. If you'd like, choose an independent lot, too.

Tell the person who waits on you that you are interested in selling your old car outright, not trading it. Used-car operations always are looking for "fresh meat," as they refer to cars. You'll be surprised to find that most operations will be happy to look at your car and give you a "buying price." Gather at least three prices like this. The highest firm offer you receive is your old vehicle's true wholesale value. (Because you actually may wish to sell your car to the used-car operation that made the highest offer, if the dealership where you're buying your new car won't meet that price, ask how long they'll stick to that offer. It's usually about a week.)

You're the boss, for a change:
Knowing your car's true wholesale value gives you tremendous power in the car transaction. If you know it's worth $10,000, for instance, you're not going to let a dealership or Web site or online buying service tell you it's worth only $8,000. Just say no to the offer, and sell your vehicle to the used-car operation that put the $10,000 "buying" figure on it.

The other big trick of the trade:
Almost all sellers will try to confuse you by acting like the selling of your old car to them has something to do with your buying a new car from them. "We'll take your old car in trade," they say.

Don't fall for that. Talking trade confuses you because it mixes two separate transactions together as if they are one. Once you know the true wholesale value of your old car, negotiate the sale of your old car entirely separate from your purchase of the new car. In essence you say, "Okay, before I tell you what I'll pay to buy your new car, why don't you tell me what you'll pay to buy my old car?"

Knowledge and simplicity always will make you money in the car business. Slow down, keep your emotion out of the transaction, and prepare to count the money you've saved!

Remar Sutton's car-buying tips have been featured on "Good Morning America," "Today," "20/20," "Nightline," and in magazines such as People, Newsweek, and Credit Union Magazine. He's president of the national Consumer Task Force for Automotive Issues.

© 2000 Credit Union National Association Inc.