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Should you refinance or trade in your car?

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Refinancing and trading in your car are two different processes — so neither is better nor worse than the other. The benefits and drawbacks depend on what you want to get out of your car and finances.

Is refinancing or trading in a car better?

Refinancing is the better option if you want to stick with 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 initially took out an auto loan. This means a lower monthly payment and less paid in interest overall.

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

Refinancing vs. trading in a car

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

However, refinancing to a longer loan term will mean 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 will need to meet in order to qualify.

Trading in a car is a much simpler process. Once you research 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 is a better choice if you want to switch 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 an auto loan. It is the better option of the two if you enjoy your car and want to lower your monthly payment. If your credit has improved, you have positive equity in your car or want to add a co-borrower, then refinancing is the way to go.

  • Gather your documents. You should know how much you still owe for your car and your current credit score. Lenders will also want to see your financial information and know more about your vehicle, including its model year and current mileage.
  • Research lenders and rates. Check out current auto refinance rates and the common requirements of lenders. Besides good credit and solid finances, lenders typically require your car to be under 10 model years old and have less than 100,000 miles on it. Most lenders also have a minimum loan amount that you will need to meet to qualify.
  • Apply with multiple lenders. Much like a new auto loan, you should apply for preapproval with banks, credit unions and online lenders. This lets you compare rates without affecting your credit score, giving you an opportunity to pick the best refinance option.
  • Confirm how the loan will be paid off. Once you sign your loan documents, make sure the lender either sends you the funds to pay off your loan or pays it for you. You will need to keep making payments until your current loan is paid off.

How trading in your car works

Dealers like to make trading in your car part of buying a new car, but it is a separate process — and should be negotiated on its own. In fact, you can shop your trade-in at multiple dealers even if you choose not to buy a car with the one you decide on.

  • Research your car’s value. Resources like Kelley Blue Book and Edmunds list average sale prices for a wide variety of vehicles. Check what your car is worth so you know you’re getting a good deal for your trade-in.
  • Check your loan. Every vehicle depreciates in value. But if you owe more than your car is worth, it can make trading it in difficult. Although you can still sell it, you may wind up having to cover the remainder of your loan if the sale price is too low.
  • Come prepared to negotiate. Much 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 squeeze more out of the dealer.
  • Hand over the keys. Once you find a dealer you want to trade in your vehicle with, sign any documents and get the title transferred. From here, you will either need to pay off your car loan or use the money as part of your down payment toward your next ride.

How to lower your monthly payment

There are a few additional routes you can take to lower your monthly payment, although some of them 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 are experiencing short-term financial hardship. But you don’t skip the payment entirely. Instead, the lender tacks it on to the end of your loan term. So, not only will you have to make up the payment later, but you will also be on the hook for additional interest.

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

Request a loan modification

Rather than refinancing with a new lender, you can try negotiating with your current lender. It may be willing to extend your loan term — 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 deny your request. It doesn’t hurt to try, but it may not be as effective as refinancing.

Pay biweekly

If you struggle to make a large lump-sum payment each month, try splitting it into two. You will essentially be making the same payment, but it could better align with your pay schedule. As an additional bonus, biweekly payments tend to result in less interest accruing on your loan.

The ideal would be to cut back on other expenses so that two smaller payments won’t put extra strain on your budget. But biweekly payments still add up to 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 out of your car. If you want to continue to drive it but need different terms for your loan, then refinancing is the better option. But if you want to change things up and drive something new, you can trade in your current vehicle to supplement your down payment. Either way, be sure to do your research and understand the value of your car before searching for lenders or visiting a dealership.

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