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

Refinancing an Auto Loan vs. Trading In Your Car

What It Means to Refinance a Car

Pros and Cons of Refinancing an Auto Loan

Pros of Auto Refinancing

• 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

• 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.

What It Means to Trade In a Car

Pros and Cons of Trading In a Car

Pros of Auto Trade-Ins

• 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

• 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?

The Takeaway