Trading in Your Car vs. Refinancing: Which Is the Right Choice for You?
If you’re trying to decide whether to trade in your car or refinance, there’s a lot to consider. Your monthly payment amount, current interest rates and your car’s value can all influence your decision.
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Keep reading as we explore when it would be better to refinance your current loan and when it might be wise to trade in your car.
When It Makes Sense To Refinance
It’s no secret that car payments have gotten out of control in recent years. According to a recent report from Edmunds.com, the average monthly new car payment hit a record high of $736 in Q3 2023. For many Americans, this is unaffordable.
If you like your car but the payments are higher than you can afford, it might make sense to refinance. Refinancing your loan can help lower your monthly payments. Refinancing your auto loans can be beneficial in the following situations.
Interest Rates Have Declined
If interest rates have fallen since you received your original loan, there’s a good chance this could translate into a lower monthly payment. However, it’s important that when you refinance, you keep your loan terms the same. If you have 36 months left on your loan, refinance with a 36-month loan. Don’t push it to 48 or 60 months to lower your monthly payment further. Over time, this will cause you to owe more on the car than its value.
Your Credit Score Has Improved
If your credit score has improved since you first received your auto loan, there is a good chance you’ll qualify for a lower interest rate if you choose to refinance.
Your Original Loan Wassn’t The Best Offer
If you didn’t shop around like you should have when you first got your auto loan, you might not have received the best possible deal. Shopping around now could potentially help you find a loan with a lower interest rate.
How to Refinance Your Auto Loan
The process is straightforward if you decide to refinance your auto loan.
Gather your documents: You should start the process by gathering your documents so you know exactly how much you still owe on your car.
Shop around: Once you know how much you owe on your car, it’s time to shop around for lenders. Choose a few and go from there. Most lenders will require a minimum loan amount and want the car to be less than 10 years old with fewer than 100,000 miles.
Apply with multiple lenders: To make sure you’re getting the best possible auto loan rate, it’s wise to get preapproved with multiple lenders. You can look at banks and online lenders.
Close the new loan and pay off the old loan: Once you’ve picked your lender and closed the loan, you need to determine how your original loan will be paid off. Sometimes, the new lender will handle the payoff; other times, they will mail you the check to do it on your own.
When It Makes Sense to Trade in Your Car
If you’ve explored refinancing your current loan, but the savings won’t provide you with the financial relief you need, it might make sense to trade in the car to purchase something more affordable.
Reducing your monthly payment isn’t the only reason why trading in a car might make sense. If you commute to work, you might spend a lot of money on gas each month. By trading in your car and purchasing a less expensive electric car, you could reduce your gas expenses, receive a tax credit, and better the environment.
How to Trade In Your Car
Most dealerships love to negotiate a trade-in while you’re looking to buy a new car. This gives them the upper hand and ensures they’ll get the best deal. However, you should complete each of these transactions separately. Here’s everything you need to do.
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Research your car’s value: First, you need to know how much your car is worth. A quick search on Kelly Blue Book can help you determine this number.
Find out how much you owe: Next, you need to know how much you still owe on your loan. Hopefully, the car’s value is greater than your loan balance. Otherwise, you’ll need to cover the shortfall out of pocket.
Negotiate: If you plan to trade your car in at a local dealership, be prepared to negotiate with a salesperson. They’ll try to get the best deal possible to make a profit when they sell the car again.
Close the deals: Once you agree on the price, you must complete the paperwork to transfer the title and finally turn over the keys.
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This article originally appeared on GOBankingRates.com: Trading in Your Car vs. Refinancing: Which Is the Right Choice for You?
