Trade-in allowances are financial incentives utilized in many different businesses. Essentially, it is the amount that a seller reduces the purchase price of new property in exchange for the acquisition of property owned by the buyer. Depending on the amount of trade-in extended by the seller, such an allowance may yield a significant reduction in the price paid by the buyer.
One of the most common examples of the use of a trade-in allowance is with the sale of motor vehicles. As part of the sales approach, car lots may advertise a specific minimum trade-in allowance to anyone who purchases a new car or truck. With this type of sales promotion, the vehicle used for the trade-in can be in any condition and still qualify for what is known as a push-pull-or-drag allowance. The potential buyer brings in a vehicle that is owned free and clear, and surrenders ownership to the dealer. In return, the dealer subtracts the amount of the allowance from the cost of a new vehicle.
However, there is no set rule that a trade-in allowance must be a fixed amount that is applicable on any trade-in. Many auto dealers allow trade-ins that are based on the condition of the vehicle offered by the potential buyer. After inspecting the potential trade-in, the dealer will make an offer of allowance to the owner. If both parties agree on the offer, the value of the allowance is applied to the sticker price of the vehicle that the buyer intends to purchase. From that point, financing is arranged to cover the remainder of the balance due.
The concept of a trade-in allowance is sometimes offered in other retail environments. Appliance dealers sometimes will extend such an allowance on items like refrigerators or stoves in exchange for consumers purchasing newer versions of like items. Buyers have the benefit of not having to pay for the removal of older appliances and also enjoy a reduction in the purchase price for the new items.
Even real estate transactions sometimes employ a trade-in allowance approach. Buyers may offer a house or other piece of property as partial payment for a different property. If amiable, the seller will accept the trade-in property at the current market value and discount the purchase price of the new property accordingly. This approach can allow a buyer to avoid having to go through the process of selling property before being in a position to make a purchase of a new home.