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Should You Refinance Your Auto Loan or Trade In Your Car?

Should You Refinance Your Auto Loan or Trade In Your Car?
Brian O'Connell
Brian O'ConnellUpdated December 5, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Consider that the average U.S. monthly auto payment for a new vehicle is now $736 and for a used one is $567, according to data from Edmunds. And some car buyers are opting for 84-month loans as opposed to the more traditional 60-month loan terms.Seven years is a long time to be spending $736 per month.Avoiding having to make regular car payments, however, isn’t easy. Even reducing the amount is tough. Oftentimes, it comes down to either trading in your current car for a more budget-friendly car payment or refinancing your vehicle at a lower interest rate, which could lower the amount of your monthly payments if you also choose to extend the term. Keep in mind, though, that extending the loan term could make it so you pay more money in interest over the life of the loan.What’s a better option for you? Let’s take a test drive and see if a trade-in or a refinancing deal can help with your high monthly auto payments. 

Refinancing an Auto Loan vs. Trading In Your Car

If you’re finding that your car payments are too high, you might be looking for ways to reduce them. Among your options are refinancing your car loan or trading in your car for a cheaper one (which can also involve refinancing your loan). Both strategies can help you reach your goal of shelling out less every month. But each one has its unique features, and it’s worth understanding them both before you make a decision.This table can help explain some of the differences and similarities:
Auto Trade InAuto Loan Refinance
Do you keep your current car?NoYes
Do you keep your current loan?No, you have a new car with a new loanNo, you have the same car with a new loan
Who do you sign the contract with?A dealership or online platformA bank, credit union, or online lender
Can you lower your monthly payments?Potentially, especially if you are buying a less expensive carPotentially

What It Means to Refinance a Car

Refinancing an auto loan means getting a new car loan that replaces your old one, ideally at a lower interest rate.The new loan pays off the old loan in its entirety. It also offers you new payment and interest rate terms that could result in lower monthly auto loan payments, thus potentially freeing up money for other household financial uses and obligations. You might consider when to refinance a car loan if your credit rate has improved (which might lead to better deals on loan interest rates) or if your original auto loan deal came with a high interest rate and rates have since dropped. You may even refinance to a longer loan term to reduce your monthly payments, though that likely means you will have to pay more in interest over the life of the loan. Recommended: 4 Reasons to Refinance Your Auto Loan

Pros and Cons of Refinancing an Auto Loan

Like any consumer loan, an auto refinancing deal has its upsides and downsides. 

Pros of Auto Refinancing

Naturally, there are many potential benefits of refinancing a car
  • May Be Easy to Get. Banks and lenders are usually amenable to refinancing your auto loan. As long as your credit score is stable, most auto loan financing companies will be open to redoing your car loan. This can also be a con, however, if you start chasing interest rates and don’t pay attention to loan fees and terms. It’s wise to compare interest rates at your own financial institution (after all, it knows you best) and online with an auto loan aggregator that can tailor a loan package to your financial needs.
  • Can Lower Your Interest Rate. A lower interest rate can save you money. Saving money is the name of the game with auto refinancing and that game starts with a lower interest rate on a refi auto loan than the one on your original auto loan deal. In general, if interest rates are lower than they were when the car was originally purchased or if your credit is more robust than when you signed off on the first loan, chances are good that you can earn a lower interest rate by refinancing.
  • Can Stretch Out Auto Loan Payments. By refinancing, you can also change the repayment terms and timetable of your original loan. Say, for example, your original loan stands at 36 months. By refinancing into a 60-month or 72-month loan repayment, you should be able to cut your monthly payments down to size. Just bear in mind that this will likely mean that you pay more in total over the life of the loan. 

Cons of Auto Refinancing

There are also potential disadvantages that can come with refinancing your car loan:  
  • Longer Loan Terms Can Cost You. If you do refinance into a new auto loan with a longer repayment timetable, you’re running the risk of adding to the total cost of the vehicle. That’s because the total repayment for a shorter loan (say, 36 months) is less expensive than the total for a long loan (say, 72 months) because the total loan is paid down more quickly, meaning total interest costs are lower on a shorter loan.
  • Depreciation May Cost You. Auto lenders may not want to lend you money for a car that’s not worth the cost of the loan. Unfortunately, vehicles — even brand-new ones — depreciate rapidly. If you purchased a car with low or no down payment, or if the vehicle has aged and lost much of its value, it could be an uphill climb getting a new auto refinancing loan.
  • Your Old Loan May Cause Problems. It’s much more difficult to refinance an auto loan if you’ve missed payments on your original loan (that makes you a high credit risk in the eyes of lenders). And you may be less willing to refinance if your original auto loan has a prepayment penalty (which can add to the total cost of refinancing into a new loan). Check the fine print on your old loan and make sure you’re caught up on payments before applying for a new auto refinancing loan.
Recommended: How Much Does It Cost to Refinance an Auto Loan?

What It Means to Trade In a Car

Trading in your car means switching out an old vehicle for a new one. Auto consumers trade in their cars for myriad reasons. Most relevant here, they may use their trade-in vehicle as a financial asset to curb the price of a new car purchase.In this scenario, the value of your current car matters to the auto dealer. If you owe less money on the vehicle than an auto dealer is willing to offer you as a trade-in, that dealer may likely take the cash overage on your trade-in amount and apply it to your new vehicle purchase. One note of caution: If you owe more on your old car than its estimated value, you likely won’t succeed in getting a good trade-in deal. Or you may need to pay off the difference in cash or have it tacked onto your new loan.Auto consumers may also trade in their vehicles because they can’t afford the payments any longer but still need a vehicle. In that scenario, trading in a more expensive vehicle for a less expensive one can take the financial pressure off a car owner, while still giving them a vehicle to drive.

Pros and Cons of Trading In a Car

Just as with refinancing, there are several pros and cons involved in a vehicle trade-in, too. That is especially true if you’re doing so to save on auto payments. 

Pros of Auto Trade-Ins

There are many potential benefits to trading in a car:
  • Can Be Fast. You can close on a trade-in in just one day. Simply drive to the dealer lot or use an online platform like Carvana, CarMax, or AutoNation, get an offer on the trade-in, and close the deal. Remember, auto dealers are in the business of getting you into a new vehicle and a trade-in is a perfectly appropriate way to do that. Dealers are also adept at selling your old car at top value, so the financial incentive for cutting a deal with an auto dealer is fairly high. That’s all in your favor when you’re trading in a vehicle.
  • You Get a Second Bite of the “New Car Apple.” When you trade in your old car, you have another chance to get a car with the features you want, such as four-wheel drive, more trunk room, or better gas mileage. While it’s true that your trade-in vehicle was probably worth more than the new vehicle you’re getting, there’s no reason your new set of wheels can’t have features you like, but that you weren’t getting in your old car — within reason.
  • A Fresh Start on a New Loan. When you trade in a newer car for a less expensive one, chances are you’re going to wind up with a lower auto loan payment — and that may be the biggest “pro” of all. Whether you’re just stretched for cash or you’ve suffered a negative life event, like a lost job or expensive divorce, a new auto loan that’s less expensive can help you get a fresh start financially and provide you with a decent car to drive.

Cons of Auto Trade-Ins

Naturally, there are potential negatives, too:
  • You Can't Expect a Boatload of Cash. Auto trade-in consumers should be realistic about the value they’ll get on a trade-in deal. Auto dealers usually don’t like to pay full price in the first place. Plus, the dealer has to ensure that the trade-in vehicle will pass inspection, detail the vehicle thoroughly, and get it ready for resale. Consequently, it’s a good idea to expect to get a decent value for a car that’s in good condition, but don’t expect to win the lottery. One rule of thumb: Expect to get 10-15% lower than the vehicle’s estimated value on a trade-in — even for a car that’s in good shape and ready to sell. 
  • There May Be Fees. Vehicle trade-in deals can come with hefty fees, including documentation fees, vehicle registration fee, and sales tax, among other expenditures. In general, any fees that come with a new vehicle purchase should be added to your trade-in budget.
  • Potential Scams. Not all auto dealers hold themselves to high ethical standards. In some situations, a dealer may try to “bait and switch” you into a different car that doesn’t meet your driving and financial needs. Or, the dealer may threaten to back out of accepting your trade-in vehicle if you don’t agree to strict terms on a new vehicle. Be patient, read all the contract paperwork the dealer is obligated to provide (or have a trusted attorney or auto financing expert do it for you), and be prepared to back out of a deal at the sign of any unagreed-upon financial risk. That may represent a hassle in the short term, but pulling back from a lousy deal can pay big dividends in the long run.

Which Is Better For You – An Auto Refinancing Deal or A Trade-In?

Deciding between a refinancing opportunity or a trade-in depends on the deal you’re getting and whether or not that deal represents your best financial move and your best vehicle-ownership move.In general, getting a lower rate on a refinancing deal can save you hundreds or (depending on the rate and the loan) even thousands of dollars. If your car is reliable and meets your needs, this may make sense for you.However, trading in a vehicle that’s too expensive to own and maintain for a lower-priced vehicle that’s still dependable on the open road can save you money and provide the safety you require when getting behind the wheel. Or, if you really just can’t afford the car you have anymore, then trading it in may be the right choice for you.The ultimate decision is up to you, so use the information above to make your auto ownership experience the best one possible for now and for down the road.

The Takeaway

When you’re looking to lower your monthly car loan payments, you have choices. You can choose to trade in your current car for a less expensive one or refinance your current auto loan to lower your monthly payment (if possible). Keep in mind that you may have to extend your loan term in order to lower your monthly payment, meaning you’ll pay more in interest overall.If you decide to refinance your car, consider Lantern by SoFi. Fill out a simple form to receive offers from multiple car loan lenders in our network.Compare auto refinance rates with Lantern.

Frequently Asked Questions

What is a car loan refinance?
What is a trade-in?
Is it better to refinance a car or trade it in?
How do you trade in a car you still owe money on?
Photo credit: iStock/praetorianphoto

About the Author

Brian O'Connell

Brian O'Connell

Brian O’Connell is a freelance writer based in Bucks County, Penn. A former Wall Street trader, he is the author of the books CNBC's Creating Wealth and The Career Survival Guide. His work has appeared in multiple media platforms, including, Bloomberg, CBS News, Yahoo Finance, and U.S. News & World Report.
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