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5 min read Published March 02, 2023.
Authored by Kellye Guinan. Written by personal and Business Finance Contributor
Kellye Guinan is a freelance editor and writer with more than five years ' experience within personal financial matters. She is also a full-time worker at her local library in which she assists the community get information on financial literacy, as well as other topics.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances by providing clear, well-researched information that breaks down complicated topics into manageable bites.
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The process of refinancing and trading your car are two different procedures, and neither is more or less than the other. The advantages and disadvantages of each depend on what you want to get out of your car and the money you have. Do you prefer refinancing or trading a car better? Both refinancing and trading in your car could save you money, but the most effective option for you is dependent on your objectives. is the best option if you want to stick with your car, but want to change the terms for your loan. You could qualify for the lowest interest rate in the event that your credit score has improved since the time you first took out your auto loan. This will result in a lower monthly payment and less interest overall. Using your vehicle as a loan means to increase your down cost. If you're looking to purchase an additional vehicle, trading it in- selling to a dealership can provide you with more cash to use. This could also result in more favorable loan terms since you can get a lower interest rate on your new vehicle. Refinancing vs. trading in a car You can refinance your car loan either with your current or a new lender. If you are lucky, the allows you to lower your interest rate or obtain an extended loan duration. Both will lower your monthly payments and help make your vehicle loan more affordable each month. But, refinancing is likely to cost you more interest. While refinancing can be a good option if you're satisfied with the car you have The lenders typically have specific requirements that you must meet to qualify. Trading in a car is a much simpler process. Once you research the value of your car and then you are able to visit various dealerships to determine what they can offer you. The objective is to sell your vehicle, and then apply the proceeds to . If you have some left in the bank, you can make it part of your down payment for the next car. It is ultimately an ideal option if you would like to try something new and you know you'll find a great deal on a new loan -- and the purchase of a used or new vehicle. How do you refinance your car? Refinancing is essentially the same as . It's more beneficial than trading in your vehicle when you love your car and want to lower your monthly installment. If your credit rating has improved or you have equity in your car or you'd like to get a co-borrower then refinancing is the way to take. 1. Take your documents. You should know how much you still owe for your car as well as your credit score. Lenders are also likely to see your financial information and know more about your vehicle, including the model year, as well as current mileage. 2. Research lenders and rates. Review the typical conditions of lenders. Apart from having excellent credit and solid financials the majority of lenders will require that your vehicle is under 10 model years old and have less than 100,000 miles. Most lenders also have an minimum loan amount that you will need to satisfy to be eligible. 3. Apply to multiple lenders. Like a car loan one should apply to credit unions, banks and online lenders. This allows you to examine rates without impacting your credit score, which allows you to choose the most suitable refinance option. 4. Confirm how you will be able to know when the loan will be paid off. After you have signed the loan documents, make sure the lender either sends you the money to pay off the loan or reimburses it for you. You'll need to continue making payments until your current loan is paid in full. What happens when you trade in your vehicle works. Dealers prefer to trade in your car as part of buying a new car, however it's an entirely separate process -- and should be dealt with separately. You are able to trade in your car with multiple dealers, even if you decide not to buy a car with the dealer you select. 1. Find out the value of your car. Sources like Kelley Blue Book and Edmunds provide average prices for a range of cars. Make sure you're getting a fair price in exchange for your used car. 2. Check your loan. Each vehicle appreciates in value. However, if you are owed , it can make trading in difficult. While you are still able to sell it, you may need to pay the remaining of the loan if the sale cost is too low. 3. Be prepared to negotiate . Like buying an automobile, you are able to negotiate the price of your trade-in. If the car you are selling is in decent condition considering its age, and has relatively low mileage, you may be able to negotiate more out of the seller. 4. Hand over the keys. If you have found an auto dealer to trade in your vehicle by signing any papers and get the title transferred. From here, you will either need to pay off the vehicle loan or use the cash to make a down payment toward your next ride. How can you lower your monthly payments There are a few additional routes you can take to however, some of them could cost more in the end. Pay off your debts in advance Most lenders will let you defer your payments for up to three months when you're experiencing an immediate financial crisis. However, you can't defer the payment completely. Instead the lender will add it to the end of your loan period. So, you won't only need to make up the payment later, but you will also be on the hook for additional interest. But, it's an option that is often used when you are unable to afford your monthly payment. But be aware that the deferral is limited and doesn't lower the overall cost of your loan. You could also be charged charges and penalties that are outlined in your agreement for forbearance. To initiate a deferral, you'll likely need to submit an emergency letter to your lender. The letter should outline the reasons you need to defer payments and the date you'll resume them. The lender may then request financial information that supports your request and helps establish the hardship you are experiencing. Not everyone is granted the option of deferring. For example, if your credit score is not good or your income is declining and you are not eligible, you might not be able to qualify. Request a loan modification instead of refinancing to a new lender You can also try . They may be willing to extend your loan term which can reduce your monthly paymentsor even alter your rate of interest. That being said that a lender might not be willing to modify the terms of your loan. You become responsible for paying your loan when you sign your contract, so your lender might decide to decline your request. It doesn't hurt to try however, it might not be as efficient as refinancing. Pay biweekly If you find it difficult to make a big lump-sum monthly payment, try making it two payments. It will be the same amount, but it's more aligned with your payment schedule. Additionally Biweekly payments are likely to reduce the amount of interest accruing to your loan. It is best to cut back on other costs so that two payments won't put extra strain for your finances. The biweekly installments still equal the same amount each month, and therefore it will not be a solution for you if your current payments are excessive. Next steps Ultimately, the choice to refinance or trade in your vehicle is contingent on what you want out of your car. The best option is refinancing when you plan to continue to drive it but require different conditions on your loan. If you'd like to change things up and get a new car then you could trade in your existing vehicle to supplement your down payment. In general, it's a good idea to put between 10-20 percentage down when buying a vehicle and the option of trading in your car can ease that burden. Whatever you decide to do, make sure to research and understand the value of your car prior to looking for lenders or going to an auto dealer.
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Written by Business and personal finance contributor
Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finance. She's also a full-time worker at her local library in which she assists the community get information about financial literacy, in addition to other subjects.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are enthusiastic about helping readers gain the confidence to control their finances by providing concise, well-researched and well-written information that breaks down otherwise complicated topics into bite-sized pieces.
Auto loans editor
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