With auto debt averaging $24,035 per borrower and interest rates fluctuating, many Americans are exploring ways to manage their car payments effectively. If you're looking to reduce your monthly payments, you might be wondering whether it's better to refinance or trade in your car.
Refinancing allows you to replace your current loan with one that offers a lower interest rate or more flexible terms. Trading in your car lets you apply its value to a new purchase. Both options can improve your financial situation by securing better loan terms.
To help you decide which strategy is best for you, let’s review the pros and cons of refinancing vs. trading in your car and how to get started with either process.
Understand your options: Trade in vs. refinance
The desire to save money is a common motivation for people choosing to refinance or trade in a car. Whatever your goals, it’s essential to carefully consider your car’s current value, existing loan terms, your budget and other factors before you proceed.
When it makes sense to trade in
Some signs it may be a good time to trade in your car include:
- Favorable trade-in value: If your car's trade in value exceeds your remaining loan balance, this could signal a good time to trade it in rather than refinance.
- Changing needs: You may need a larger car for a new career or a growing family. You might also want to downsize to save on gas and other costs.
- Negative equity management: If you're facing negative equity — owing more on a loan than the car is worth — trading in the car may allow you to roll that debt into a new loan.
When it makes sense to refinance
Some signs it may be a good time to refinance your car include:
- Falling interest rates: If market interest rates drop, refinancing could reduce the cost of the loan over time.
- Improved credit score: If your credit score has improved since your original loan, you could be eligible for more favorable rates and terms.
- Changing loan terms: If you need lower monthly payments, refinancing allows you to adjust your loan term. Keep in mind that extending payments could increase the total cost of your loan.
How a trade-in works
If you decide to trade in your car, it can simplify the process of buying a new one. Here are the typical steps:
- Determine the value: Start by using popular online tools like Kelley Blue Book or Edmunds to estimate your car's trade-in value. This will give you a realistic idea of what price to expect.
- Collect essential paperwork: Gather the required documents, such as your car title, registration, maintenance records and relevant loan information.
- Prepare your car: Clean your vehicle inside and out and consider minor repairs like fixing dents or worn tires.
- Shop around: Each dealership may value your car differently, so comparing trade-in offers can help you secure the best deal.
- Negotiate the trade-in value: Use your research to negotiate a deal that reflects your car’s market value. A good rule of thumb is to never accept the first offer.
- Apply the trade-in credit: The dealership can apply the trade-in value toward the purchase price of your new car or pay it directly to you.
- Finalize the paperwork: Review and sign the necessary documents to transfer ownership and settle any remaining loan balance.
Pros and cons of trading in your car
Before trading in your car, it's important to weigh the advantages and disadvantages.
The pros:
- The trade-in value is applied directly to your new car purchase, reducing the overall cost.
- You avoid the hassle of advertising and negotiating with private buyers.
- In some states, trade-in values are exempt from sales tax, reducing taxable amounts.
The cons:
- If you owe more than the car’s value, you’ll need to cover the difference.
- Dealerships may push you into accepting lower offers.
- Trade-in values are often lower than what you could get from a private sale.
How auto loan refinancing works
Auto loan refinancing involves replacing your existing loan with a new one, ideally with better terms. Here’s a step-by-step overview of the process:
- Assess your finances: Start by reviewing your current loan terms, including the interest rate, monthly payment and remaining balance.
- Check your credit: Your credit score significantly impacts the refinancing rates you can secure. Higher credit scores tend to result in better terms in the eyes of lenders.
- Compare lenders: Shop around to find lenders offering competitive interest rates, fees and favorable terms.
- Get preapproved: Choose the lender with the best terms, gather the necessary documents and submit your application for preapproval.
- Complete the application: Provide the required documents, such as proof of income, insurance and vehicle information, to finalize the loan.
- Finalize the process: Once approved, review the new loan agreement and, if satisfied, accept the new terms.
Afterwards, the lender will pay off your existing loan and you’ll begin repaying the refinanced loan under the new terms.
Pros and cons of refinancing your car
Weighing the upsides and downsides can help ensure that refinancing will help you meet your financial goals.
The pros:
- Improved credit or lower market rates can reduce your interest, saving money over time.
- A lower monthly payment could free up funds for other priorities in your budget.
- Refinancing for a larger amount allows you to access cash for other expenses.
The cons:
- Longer terms may lower monthly payments but increase total costs.
- A lower credit score might make refinancing less favorable.
- A cash out refinance may result in owing more than your car is worth.
Should you trade in or refinance?
When deciding whether to trade in or refinance your car loan, you'll need to weigh current market trends, your car's value, your individual financial goals and other criteria.If you're happy with your current vehicle but want better loan terms, refinancing may be the best option. On the other hand, if you want or need a different car, trading in your vehicle can offer convenience and potential funding for your next purchase.
FAQs
Here are some answers to common questions that could help you decide between trading in vs. refinancing your car.
Is it better to trade in a car or refinance?
The answer will depend on your situation, market conditions and your overall financial goals. Generally, refinancing will allow you to replace your current loan to obtain better loan terms. On the other hand, trading in your car can unlock money for a new vehicle and simplify the buying process.
Can you trade in a car after refinancing?
Yes, you can trade your vehicle at any time, even after refinancing. Before you start, make sure the trade-in value covers the remaining loan balance, especially if you've recently refinanced.
What factors should I consider when deciding to refinance or trade in my car?
The key factors to consider are your car’s value, loan balance and your long-term financial goals. Generally, refinancing can help you secure better loan terms or lower monthly payments. Trading in is a better option if you're ready for a new vehicle or wish to unlock immediate value from your car.
