Should You Trade In or Refinance Your Car?
When you’re looking to save money on your car payments, you may be asking yourself, “Is it better to refinance a car or trade in my vehicle?” The answer is that it depends. Both options can potentially lower your monthly payments and free up some cash in your budget.
However, deciding which option is best for you depends on several factors, including your credit score, the current value of your car and your long-term financial goals. If refinancing saves you money or reduces your financial stress, it might be the best choice. But if you’re looking for a new or more affordable car, trading in could be the better option.
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When to refinance your car loan
If you want to keep your car but change your payment, refinancing your auto loan might be a good solution. There’s no guarantee that you’ll qualify for a better loan by refinancing, but you’re likely to get better terms if:
Interest rates have gone down
Your credit score has improved
You’ve gained equity in your car (meaning it’s worth more than you owe)
You’ve had an increase in income
If none of the above apply to you, you might still consider refinancing for the sake of your budget. If you can get a loan with a longer loan term, for example, you can reduce your monthly car payments. Just keep in mind that stretching out your repayment also increases the amount you’ll pay in interest over the life of your loan. And while it is possible to refinance your car with bad credit, you’re less likely to save money with a low credit score.
How to refinance your car
These are the steps you’ll need to take when you’re ready to refinance your car loan:
- Shop for a lender. Applying for an auto loan preapproval from multiple lenders can help you find the best lender for your needs. You can also compare lenders’ rates, fees and terms to determine which loan is most cost-effective.
- Apply. Next, you’ll need to submit your loan application. This typically means providing details about your loan and your car and submitting copies of your driver’s license, registration, title, pay stubs and proof of insurance.
- Pay off your current loan. Once approved, you’ll need to use the funds from your refinance loan to pay off your existing loan. Some refinance lenders will make the transaction on your behalf if you provide them with the necessary information.
- Make payments on your refinance loan. Be sure to identify the monthly due date for your new loan payment and make payments on time. If you don’t, you risk vehicle repossession and damaging your credit.
When to trade in your car
There’s a long list of reasons you might want to trade in your car. For starters, trading in your car can lead to financial relief if the new vehicle:
- Costs less than your current car is worth
- Has better gas mileage
- Requires less maintenance
Trading in is also more convenient than selling your car privately, though it’s not likely to get you the most value for the vehicle.
How to trade in your car
Be sure to follow these steps if you want to get the best deal for your vehicle trade-in:
- Research your car’s value. Dealerships are known for offering bottom-dollar for trade-ins. Avoid losing money on the transaction by using online valuation tools like Kelley Blue Book (KBB) to determine what your car is worth. You can also get quotes and offers from online marketplaces like CarMax.
- Shop around for your next car. Don’t limit your options to the nearest car lot. Instead, search multiple dealers’ online inventories to find the most affordable vehicle available. Just like researching your car’s value, comparing sticker prices can help you negotiate the best price for a purchase.
- Gather your documents. You’ll need several documents to complete the trade, including your car title, registration, maintenance records and details of your loan.
- Make the trade. You may need to visit a lot to sign the paperwork and close the deal, but some companies let you schedule an at-home appointment.
Other ways to lower your monthly payment
Refinancing and trading your car in can both be good ways to save money, but there are other options available for car owners. If your main goal is to improve your financial situation, consider these alternatives:
- Sell your car privately: Get the most value out of your car by placing it for private sale on a site like Craigslist, instead of taking it to a dealership.
- Loan modification: Work with your lender to extend your repayment timeline and reduce your monthly payments.
- Review add-ons: Review your insurance coverage to see if you can cancel GAP coverage, and check to see if you have an extended warranty that you no longer need.
Frequently asked questions
It can be more difficult to refinance a car with negative equity than one with positive equity, but it is possible. Lenders are most likely to refinance an underwater loan if you have good credit.
Refinancing a car loan can save you money if it reduces your APR or leads to quicker payoff of your loan, since faster payoff means fewer interest charges. Refinancing can also lower your monthly payment by extending the loan term, but this will increase your overall interest charges.
The soonest you can refinance a car is typically 60 to 90 days after taking out a loan (this may be more related to the time it takes to transfer your title), but you may want to wait longer to qualify for better terms. You can use this extra time to improve your credit and income, and/or gain equity in your vehicle.
There are various guidelines for how much your maximum car loan should be, but the best way to find out if a car is affordable is to examine your budget. Make sure the car payment fits into your monthly budget, and that you can afford the down payment and ongoing costs like insurance, gas and maintenance. You can also use the 20/4/10 rule to determine the ideal amount to spend on car-related expenses.
If you want to reduce your total cost of car ownership, refinancing and trading in a car can both be good options. While refinancing can lead to better loan terms, trading in a car can lead to a lower cost of vehicle ownership.