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Should You Trade In or Refinance Your Car?

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The options of trading in your car and refinancing your car both provide a new chance to change how much you spend each month on transportation. You should refinance your car if it saves you money on interest and/or lowers your car payment to lessen financial stress. You should trade in your car if a different vehicle will ultimately be a better solution. Here are the details on each situation and who it’s best for, as well as some other alternatives.

Should I refinance my car?

You should refinance your car if you want to keep it and change your car payment.

Refinancing your car could lower your interest rate. 

A small percentage-point change in interest can help you save a lot of money over the life of the loan. Use an auto loan refinance calculator to see how much you may save. The factors lenders consider favorably are whether:

  • Your credit score and/or income has increased since you originated your current loan
  • You have positive equity (the car is worth more than what you owe on it)
  • You add a cosigner who has a good credit score or income

Refinancing could lower your car payment. 

A lower APR could reduce your monthly car payment by itself, but another way to lower your payment is to extend the loan term. If you have three years (36 months) left on your auto loan and you refinance it to a four-year (48-month) term, your payments could decrease. Be careful with this option, however. The longer the loan term, the more money you’ll pay in interest over the life of the loan. Here are the current lowest auto loan refinance rates. Potential lenders include your local credit union, bank or an online lender.

Here’s how different APRs and terms affect the payment on a $21,000 auto loan:

How APR and term affect monthly payment and total interest 
APR Loan term Monthly payment Total interest
2% 48 months $456 $869
2% 60 months $368 $1,085
5% 48 months $484 $2,214
5% 60 months $396 $2,778
8% 48 months $513 $3,608
8% 60 months $426 $4,548

Should I trade in my car?

In this case, trading in your car means “get another car.” There are hundreds of possible reasons to get a different vehicle. If you decide to do so, the most important thing is to make sure it’s affordable.

Below is a short guide on how to set up your budget for success when you want to purchase a new car.

Look at your budget. Owning a car costs more than its payment. What you pay for taxes, fuel, insurance and maintenance may go up or down depending on your vehicle. Total transportation costs should not be more than 15% of your income.

  • Fuel: You can look up any vehicle’s fuel economy on the official website provided by the U.S. Department of Energy.
  • Insurance: The cost of insurance varies depending on the type of car and how much coverage you select. You could estimate costs by using a coverage calculator like this one from GEICO or ask for some quotes.

Use some calculators. Once you know the monthly payment range you can afford for your new vehicle, use it to help you shop for cars.

Get preapproved. Instead of waiting at the dealership to hear whether you’re approved for a car loan, get an auto loan preapproval before you go.

What are some alternatives?

The alternative that’s best for you depends on what your goal is.

  • Sell your car privately: Selling your car to another person directly typically earns more money than trading it in to a dealership.
  • Talk to the lender: If you’re having difficulty making the car payment, contact the lender and ask for a payment deferral. You will still owe the money and pay interest on it, but you will have more time. For example, a 90-day deferral allows a borrower to go about three months without making a payment. This can provide some immediate stress relief and enough time to get one’s finances in order before resuming payments.
  • Pay off your loan faster: Here are 11 ways to pay off your car loan faster and 7 ways to deal with negative equity (when your car is worth less than what you owe on it.)
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