Should I Refinance My Car Before Trading It In?

Refinancing your auto loan and trading in your car can both help reduce your car payment. But could combining them amplify the benefits? In most cases, one or the other will be better. However, refinancing your car before trading it in can help you save if the trade-in won’t happen for several months. 

Here’s a closer look at the pros and cons of refinancing and trading in your car and when doing both may make sense. 

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When to trade in or refinance your car

Deciding whether to trade in or refinance your car depends on your needs and financial situation. Below are common scenarios where each option can be best. 

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When to trade in your car

Trading in your car can be helpful when:

• You need a different vehicle: Life changes like a longer commute, a shift in lifestyle or a growing family can trigger the need for a new vehicle. 
• You want to avoid expensive repairs: If the cost of repairing or maintaining your vehicle starts to outweigh its value, trading in your car for a newer one can help you save and enjoy more peace of mind. 
• You want to avoid depreciation: It can be advantageous to trade in a car before it loses significant value, either from age or high mileage. 
• You prefer newer vehicles: If you prefer to drive newer cars with the latest features and technology, you may want to trade yours in once it’s a few years old. 
• You need to reduce your payments: If your payments are higher than you’d like, you can trade in your car for a more affordable one.

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When to refinance your car loan

‍Refinancing your car loan can be helpful if you want to keep your car and:

• Your credit scores have improved: If your credit scores have improved since getting your car loan, you could qualify for a lower interest rate and reduce your borrowing costs. 
• Market interest rates have dropped: If average interest rates have dropped since you got the original loan, you may qualify for a lower interest rate that helps reduce your borrowing costs. 
• You need lower monthly payments: If you’re having trouble affording your car payment, you may be able to refinance into a lower one by getting a lower interest rate and/or extending your loan term. 
• Your vehicle’s value has stabilized: Once your car’s depreciation has leveled off and you’ve built some positive equity, you may qualify for better refinancing terms or be able to cash out some of the equity.
• You’re unhappy with your lender: If you’re unhappy with your lender for some reason, refinancing allows you to choose a new one. 

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Can you trade in a car after refinancing?

‍You can refinance your car loan before trading in your car but there are a few potential drawbacks. First, the vehicle title transfer between lenders can take weeks to months. If it isn’t completed by the time you trade in your car, the dealership may deny or delay the transaction. Additionally, refinancing typically causes your credit scores to drop temporarily. As a result, if you trade in your car before your credit recovers from the refinance, it may hurt your ability to qualify for a new loan or get competitive rates. However, refinancing before a trade-in can be beneficial if it’s done far enough in advance and offers you a financial benefit. For example, suppose you refinance your car and reduce your monthly payment by $150. If you wait a year to do the trade-in, your credit will have time to recover and you’ll save $1,800 in monthly payments. ‍

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Steps to trade-in your car after refinancing

‍If you’ve already refinanced and are considering a trade-in, these steps can help you get the best deal. 

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‍1. Determine your car’s value

‍Start by researching your car’s value to know when a dealer is offering you a competitive deal. You can get an estimate online through vehicle valuation tools provided by companies like Kelley Blue Book and J.D. Power. To get the most accurate estimate, be prepared to provide your VIN (vehicle identification number), current mileage and detailed information about your vehicle’s features and condition.

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‍2. Know what you owe

‍Next, check the outstanding balance on your current car loan so you know how much needs to be paid off during the trade-in. You can often find it online through your loan account dashboard or by calling your lender’s customer support line. If your trade-in offer doesn’t cover the amount, you’ll have to pay the difference out-of-pocket or roll it into your next loan.

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‍3. Shop around for trade-in offers

‍With your car’s value and pay-off amount, you’re ready to shop around for trade-in offers. Visit at least three dealerships and see what they’ll offer you for your vehicle. Also, remember that you can try to negotiate a higher offer. Dealers likely want to win your business, even if they don’t initially act like it, so they may be willing to compromise.

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‍Is it better to refinance or trade in?

‍Refinancing and trading in your vehicle can each be beneficial. The better choice for you will depend on the details of your situation. Refinancing is better if you want to keep your current vehicle but improve your car loan or switch lenders. On the other hand, a trade-in is better when you’re ready to get a new vehicle and a new auto loan. Combining the two — refinancing and then doing a trade-in — may also be beneficial if you’re planning to trade in your car down the road and want to save in the meantime. 

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‍FAQs

‍Still have questions? Here are some quick facts about refinancing auto loans and trading in cars. 

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‍What to avoid when refinancing a car?

‍When refinancing a car, avoid taking the first loan quote you receive. Instead, shop around and get quotes from at least three lenders. Once you have multiple offers, compare them carefully. Be sure to review key details including the interest rates, fees, loan terms, monthly payments and overall costs. 

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‍Does trading in your car hurt your credit?

‍Getting a new loan as part of a trade-in requires a hard credit inquiry which typically causes a temporary drop in your credit score. However, credit scores often recover after a few months of on-time payments. ‍

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Are there any benefits to refinancing before trading in a car?

‍If you qualify for a lower monthly payment, refinancing your auto loan could help you save as you wait to trade in your car. For example, if a refinance saves you $50 per month and you plan to trade in your car in nine months, you could save $450. ‍

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Can you trade in and refinance a car at the same time?

‍While you may be able to refinance your car loan and trade in your car at the same time, it may lead to complications. Both actions require title transfers which could cause confusion, delays and denials. Additionally, both temporarily impact your credit which could lead to application denials and higher borrowing costs. Generally, it doesn't benefit you to refinance a car immediately before you trade it in because the loan gets paid off and closed as part of the trade-in process. 

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Can you sell a car after refinancing?

‍Yes, you can sell a car after refinancing it. However, if you try to sell it immediately after refinancing, you may run into an issue with the title transfer. It’s best to wait until the transfer from the refinance is finished so the title can be seamlessly sent to the new owner.