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Should You Trade In or Refinance Your Car?

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Making payments on a car can get old, especially when the “new car” excitement is over, and the payments seem to stretch out forever. Trying to make unwieldy high payments is even worse and all too common.

“In the last week or so, I’ve had three or four phone calls from people who can’t afford their current car payments and are trying to avoid repossession,” said Todd Christensen, an accredited financial counselor and education manager at Money Fit by DRS Inc. in Boise, Idaho. “It’s heartbreaking because it’s not like credit card debt, where you have a lot of options. It’s not uncommon for me to see a household with vehicle expenses of 30-40% of their income.”

If you’d like to get out of your current car payments, possibly because they are causing you financial stress, you may be considering trading in your car for another, cheaper one or refinancing and getting a better loan without changing cars. Other options may include selling your car or, if you believe repossession is unavoidable, voluntarily surrendering your car to the lender.

Pros and cons of trading in your car

Consider these factors before you decide to trade in your car for another:

Pros of trading in your car:

  • It’s fast and easy. You drive to the dealership, and they generally give you a trade-in offer then and there. The dealer is motivated to take your car so they can sell you another one. “Many dealerships offer trade-in guarantees,” said Christensen. Such deals are probably legitimate at franchised dealerships, but beware when a business offers a guaranteed amount of money no matter the condition or how much you owe — such places may either increase the price of the new car you’re buying or roll your negative equity into the new loan.
  • You get a new, or at least a different, car. If your car is starting to spend a lot of time in the shop and it’s no longer a dependable source of transportation, you may need a different car. Likewise, if you need a car with more seats or less, it might be time to get a vehicle that better meets your needs.
  • You can trade in for a less expensive car. As long as you owe less on the car than the dealer is willing to give you as a trade-in, the dealer takes the excess of your trade-in amount over your loan balance, and applies it to the purchase of your new car. Things get a bit more complicated if you’re “underwater” on your loan, or owe more than the car is worth. This might happen if you didn’t make a down payment or if you had a high interest rate. It’s not a good idea to trade in, unless your new car comes with enough incentives to cover your debt.
  • You start over with a new loan. If rates are down, or you have better credit now than you did when you bought your old car, or if you’re just a more savvy shopper this time around, you might get a better deal on the new loan. That will save you interest expense over the long term.

Cons of trading in your car:

  • You probably won’t get the highest price for your car. The dealer can’t afford to pay you full retail price for your car. “They have to inspect it, clean it and turn around and sell it for a profit,” said Christensen. You’ll generally get more for your car if you sell it yourself.
  • It can be tricky to keep two deals separate. It’s always a good idea to negotiate the price of your new car and your trade-in price separately. The best way to do this is by going into negotiations with your research in hand — you can look up values on Kelley Blue Book or NADAguides. Dealers can make you think you’re getting a good price on your trade-in, but keep the price on the new car high. Or they can lower the price of the new car, and give you next to nothing for your trade-in. It can be harder to tell if you got a really good deal with two deals going on at once.
  • Trading in costs money. You generally pay documentation and other fees whether you trade in or refinance your car. However, in most states, you pay sales tax when you trade in and buy a new car, which can be a substantial expense.
  • Beware of trade-in scams. Disreputable car lots may hold your trade-in hostage unless you agree to their terms for the next car. This sometimes happens when spot financing leads to “yo-yo” deals where buyers agree to one deal only to be called back to finalize paperwork for a different, more expensive, one.

Pros and cons of refinancing your car

Pros of refinancing your car:

  • You may be able to get a lower interest rate. If interest rates are lower now than when you took out your loan, or if you qualify for a better rate because your credit score has improved, refinancing can help you save on interest expense. All else being equal, your monthly payments should be less.
  • You might want a different loan length. If you signed up for a three-year loan, for example, but you’re finding the payments a little steep, you could refinance with a longer-term loan and have lower payments. The risk of a long-term auto loan is becoming underwater on your loan if you don’t pay down the balance as fast as the car depreciates in value.

Cons of refinancing your car:

  • It’s hard to refinance if you’re already underwater. “Financing a vehicle that is worth less than the amount owed is a tall order,” said Christensen. “Lenders are loath to make a loan on something that is worth less than the amount of their loan. Those willing to take such a high risk will likely charge an exorbitant interest rate.” You’re more likely to be underwater in the following circumstances:
    • You made little or no down payment when you purchased the car. New cars especially tend to depreciate quickly in the first few years.
    • Your car is old. A car with too many miles or one that’s just too old may not be valuable enough to refinance.
  • Refinancing may be impossible if you’ve fallen behind. If you’ve already missed payments, lenders will see you as a high-risk borrower. “It’s unlikely a new lender will refinance your debt,” said Christensen.
  • Your old loan may have a prepayment penalty. Check your old loan contract, and make sure you don’t have to pay more than your current balance to get out of the loan.
  • May be time-consuming. By the time you pay any fees, and spend time shopping for and applying for a loan, you hope to save a significant amount of money. If not, your time is better spent elsewhere.

Eliminate guesswork with the auto refinance calculator

Wondering if it’s worth it to refinance at a lower rate, or for a different loan length? There’s no need to guess. Use an auto refinance calculator to see exactly how refinancing would help you.

Enter your current loan information. You’ll need to know your original balance, current balance, monthly payment,and interest rate. Based on that information, the calculator determines how much time you have left on the loan, and how much interest you’ll pay between now and the end of the loan, if you pay it off as scheduled.

Then, enter information on the refinance loan you want. Experiment with different loan terms and interest rates, and look to see how much money you could save over the life of your loan. It can be surprising how much interest expense you’ll save, with even a small change in your auto loan interest rate.

What other options should you consider?

What if you’ve explored trading in or refinancing your car, and neither option solves your problem? Don’t waste time trying to do something that won’t work, or worse yet, end up deeper in debt or with higher car payments.

These are a few options besides trading in or refinancing you might consider:

  • Find money to pay off (or pay down) your car loan. You might sell something, work extra hours or take money from savings, for example. Every bit you pay down on the principal of your loan will save you interest expense on your loan.
  • Sell your car and buy one with cash. It might not be pretty, but the right cheap, older car can get you where you need to go. If you can buy it without a loan, your monthly budget should be a lot happier. If you use the money you would be spending on car payments to save up for your next car, you’ll really start to improve your financial situation.
  • Go without a car temporarily. Depending on your situation, including your work and access to other transportation, you might be able to do without a car, or a second car, until your finances improve.
  • Seek financial counseling. If you are feeling stressed about your debt, and you aren’t sure what to do about it, you should probably talk to a credit counselor. Christensen says you should focus on eliminating debt. “Someone may need to go through their budget with a fine-toothed comb,” he said. Look for a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. 

How to get a great deal with a trade-in car

As we mentioned earlier, the best way to get a great trade-in price on your car is to show up at the lot already knowing what you expect to get from it. You can look up the KBB or NADA trade-in value of your car online.

A trade-in deal isn’t over until you also get a good price on your next car. Getting the amount you want for your old car won’t help if you overpay on the new one. Be aware of the seesaw effect of the trade-in price versus the new car price as you make a deal.

Whether you go to a “no-haggle” dealership or stick with a traditional dealership that allows more back-and-forth, the secret to getting a good deal is knowing what the car should cost. Do your homework on the new car before you try to make a deal. You’ll want to be sure you get a good deal on both a car and a car loan that you’ll be happy with for a long time.

How to get a great deal on refinancing

If you’re going through the trouble to refinance, make sure you get the best deal possible this time around. Before you start looking, make sure your credit score is in shape, and take steps to fix it if it’s not. You won’t get your best refinancing rates with so-so or bad credit.

The best way to find a great deal on a car loan is to shop around. That doesn’t have to be difficult. You can start your search on LendingTree. Fill out one online form, and receive up to five potential refinance auto loan offers from lenders at once, depending on your creditworthiness.

The bottom line: Trade in or refinance?

If you’re struggling with car payments, or if you’d just like to get out of the car loan you have, it’s important to know exactly what you hope to accomplish before you make any decisions. If your primary goal is more affordable payments, and you haven’t purchased too much car, consider refinancing at a lower rate or with a longer-term loan.

If your car is too rich for your current financial situation, refinancing may not help make your payments affordable enough. In fact, if you’re in financial trouble, you may not be able to refinance. In that case, you may need to get rid of the car by selling it or trading it in and getting a car and loan that you can comfortably afford. Likewise, if you’re making payments on a car that is undependable or is costing too much to maintain, you may need to trade it in for a car that meets your needs.

Be sure to look at your total financial picture before you make major decisions like trading in or refinancing a car. Consider where you stand right now financially and what goals you want to reach. Then, make a decision you can live with, and that will help you attain your goals.


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