Should you refinance or trade in your car?

Refinancing and trading in your car are two different processes – so neither is better or worse than the other. The pros and cons depend on what you want out of your car and your finances.

Is refinancing or exchanging a car better?

Refinancing is the best option if you want to keep your current car but want to change the terms of your loan. You may be able to qualify for a lower interest rate if your credit has improved since you originally took out a car loan. This means a lower monthly payment and less interest paid overall.

Using your car in exchange allows you to complete your down payment. If you want to buy a different car, trade-in – selling to a dealership – will give you more money to work with. It can also mean better loan terms since you can borrow less on your next vehicle.

Refinancing vs trade in a car

The refinancing process allows you to find a new lender who will either offer you a lower interest rate or a longer loan term. Both will reduce your monthly payment and potentially make your car loan more affordable each month.

However, refinancing for a longer term loan means you pay more interest. And while refinancing is a good option if you’re happy with your current vehicle, lenders often have strict requirements you’ll need to meet to qualify.

Trading in a car is a much simpler process. Once you have researched the value of your vehicle, you can visit different dealerships to see what they will offer you.

The end goal is to sell your car and then use the money to pay off your current loan. If you have any left over, you can use it as part of your down payment for your next car. Ultimately, it’s a better choice if you want to change things up and know you can get a good deal on a new loan – and a new or used car.

How refinancing your car works

Refinancing is essentially the same as getting a car loan. This is the better option of the two if you love your car and want to lower your monthly payment. If your credit has improved, you have positive equity in your car, or you want to add a co-borrower, refinancing is the way to go.

  • Gather your documents. You should know how much you still owe on your car and your current credit score. Lenders will also want to see your financial information and learn more about your vehicle, including its model year and current mileage.
  • Research lenders and rates. See current auto refinance rates and common lender requirements. Besides good credit and solid finances, lenders generally require that your car be less than 10 model years old and have less than 100,000 miles. Most lenders also have a minimum loan amount that you will need to meet to qualify.
  • Apply to several lenders. Just like a new car loan, you need to get pre-approved from banks, credit unions, and online lenders. This lets you compare rates without affecting your credit score, giving you the flexibility to choose the best refinance option.
  • Confirm how the loan will be repaid. Once you have signed your loan documents, make sure the lender sends you the funds to repay your loan or pays them for you. You will need to continue making payments until your current loan is paid off.

How Your Car Trade Works

Dealerships like to make trading in your car an integral part of buying a new car, but it’s a separate process and should be negotiated on its own. In fact, you can buy your trade-in at multiple dealerships even if you choose not to buy a car with the one you choose.

  • Research the value of your car. Resources like Kelley Blue Book and Edmunds list average sale prices for a wide variety of vehicles. Check the value of your car so you know you’re getting a good deal on your trade-in.
  • Check your loan. Each vehicle loses its value. But if you owe more than your car is worth, it can be difficult to trade it in. Although you can always sell it, you may have to cover the rest of your loan if the sale price is too low.
  • Come prepared to negotiate. Just like buying a car, you can negotiate your trade-in. If your car is in good condition for its age and has relatively low mileage, you may be able to get more from the dealership.
  • Return the keys. Once you have found a dealer you wish to trade in your vehicle with, sign all the paperwork and have the title transferred. From there, you’ll either have to pay off your car loan or use the money as part of your down payment for your next ride.

How to lower your monthly payment

There are a few more avenues you can take to lower your monthly payment, although some of these may end up costing more in the long run.

Defer your payments

Most lenders will allow you to defer your payments for up to three months if you run into short-term financial difficulties. But you’re not completely skipping the payment. Instead, the lender fixes it at the end of your loan term. So not only will you have to catch up on the payment later, but you will also be liable for additional interest.

However, it’s a common solution if you really can’t afford your monthly payment. Just be aware that the deferral is limited and will not reduce the overall cost of your loan.

Request a loan modification

Rather than refinance with a new lender, you can try negotiating with your current lender. They may be willing to extend the term of your loan – which could lower your monthly payments – or adjust your interest rate.

That being said, a lender may not be willing to modify your loan. You become responsible for paying your loan when you sign your contract, so your lender may choose to refuse your application. It doesn’t hurt to try, but it may not be as effective as refinancing.

Pay every two weeks

If you’re struggling to make a large lump sum payment each month, try splitting it in half. You’ll make essentially the same payment, but it might align better with your payroll schedule. As a bonus, bi-weekly payments tend to result in less accrued interest on your loan.

It would be ideal to reduce other expenses so that two smaller payments do not weigh on your budget. But bi-weekly payments always total the same amount each month, so it won’t be a solution if your payments are already too high.

Next steps

Ultimately, the choice to refinance or trade in your car depends on what you want from your car. If you want to keep driving it but need different terms for your loan, refinancing is the best option. But if you want to switch things up and drive something new, you can trade in your current vehicle to top up your down payment. Either way, be sure to do your research and understand the value of your car before researching lenders or heading to a dealership.

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About Veronica Richards

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