Is your monthly car payment draining your bank account? You are not alone. In fact, Americans owe $1.2 trillion in auto loans, and this number is only increasing.
You have options, and you don’t have to be locked into a loan until it’s paid off. We will walk you through the options of refinancing and trading in your car. Find out which option is the best fit for you!
What is a car refinance?
Refinancing a car means you take out a new car loan to pay off your existing loan. The rationale is that you now get to choose a loan with lower monthly payments.
Usually, this looks like a lower interest rate, but it could also change the length of your loan. We’ll walk you through the process below.
How long should I wait to refinance my car?
There are some advantages to waiting six months to refinance your car. Car loans affect your credit score so you will notice that your credit score takes a dip after taking out an auto loan. As a result, your credit score needs time to recover. It’s ideal to apply for a new car loan when you have the best possible score.
But you don’t have to wait forever to refinance your car. First, weigh the pros and cons of refinancing at this point in time. If you want to refinance ASAP and you can comfortably do so, it may be in your best interest to act now.
Let’s look into some of the advantages and disadvantages of refinancing your car!
Advantages of refinancing
The most significant advantage of refinancing your car is lowering your interest rate and your loan term. In an ideal world, both of these will happen.
Lowering your interest rate is one of the biggest lures to refinancing a car loan. There are a few reasons your interest rates can change over time, like if your credit score improves and you now qualify for a better rate. Another reason your interest rate might go down is if the market changes in a way where everyone has access to better rates.
Additionally, you might consider refinancing your car if you experience a change in terms of your current loan. Or maybe you want to pay off your loan faster. Refinancing and receiving lower rates can help you accomplish this.
Many people refinance their car because the monthly payments on their current loan are putting too much pressure on their budget. You can also refinance for longer terms, leaving you with smaller monthly payments, but this plan of action comes with a caveat. Keep reading to find out more!
Disadvantages of refinancing
Refinancing is not a good fit for everyone because a refinance means an increase in the length of your auto loan. If you extend your loan terms, you will pay more money.
The only reason to refinance is if you feel like you’re in over your head with your car loan and need to perform some damage control. The average person does not need to refinance because this is a rare occurrence for most people.
There are also prepayment penalties to worry about when refinancing, so analyze your current loan closely for these. These are fees that you’ll accrue from the lender for paying off your loan early. It may not even be worth the lower rates to refinance if these penalties are too high.
Another thing to consider when evaluating whether or not you should refinance your car is the value of the car itself. Do you want to get stuck paying off a loan on a car that is decreasing in value every day? Paying a loan outlasts the value of the car causes you to run the risk of having to pay a loan for a car that is worth significantly less than the loan. This is called going upside down on a loan.
What is a trade-in?
A trade-in is when you turn in your car for a different car. At the dealership, your current car will be awarded a value that will then be subtracted from the price of your new car.
And yes, you can trade in a financed car. The advantages and disadvantages have to do with where you are with your loan.
Advantages of a trade-in
If you walk into the dealer tomorrow with a car that is worth more than what’s left on the loan, then you have what’s called positive equity.
Let’s consider this example. You have a car worth $10,000, but you only have $5,000 left to pay on your loan. This means you will trade in your current car and then have $5,000 in equity to put towards your new vehicle.
This is the most significant advantage of a trade-in. You can leverage your equity when buying a new car.
Disadvantages of a trade-in
However, the exact opposite situation can happen and cause many disadvantages. In the opposite scenario, you could be underwater with your loan. In this example, you may have a car worth $5,000 but owe $10,000 on the car loan. You would actually have to pay an additional $5,000 for your next car.
When should I trade in my car?
Trading in your car works best if you have positive equity. Make sure you are keeping an eye on the value of your vehicle and what’s left on your loan.
Comparing a refinance vs trade-in
You may still be asking yourself, “Should I refinance my car or just trade it in?” There is no one-size-fits-all answer to this question, but the following advice can provide you with a good starting point.
If your car has high equity, then a trade-in might be right for you
Take a look at your loan. Do you owe less than your car is worth? If so, then you’re in a pretty good place for a trade-in because your car has equity.
It might not be worth it for you to refinance if you plan on getting a new car soon. This way, you can use your existing car while it’s still valuable.
A good credit score can help you refinance
Do you have excellent credit but somehow ended up with a bad deal on your car loan? Refinancing your car loan may be the answer. You will have the opportunity to negotiate a better rate and adjust the terms of your loan.
Credit Builder Plus membership can improve your credit score
But what do you do if you don’t fit into either situation? MoneyLion’s Credit Builder Plus membership can help. MoneyLion has made it easy to improve your credit score.
Credit Builder Plus is a membership that can help you build or rebuild your credit even if you are new to credit or have typically been unable to access traditional financial products. This powerful membership costs $19.99 per month, and it also includes several features and benefits, such as:
- Competitive rates: As a member, you’ll have access to competitive-rate installment loans up to $1,000 that help you save money and build credit through a positive payment history.
- Credit monitoring tools: You can directly monitor your credit score and key credit factors, like your credit utilization, in the MoneyLion app. Best of all, your information is updated weekly.
- 0% APR cash advances: Your membership includes access to Instacash advances of at least $50 per direct deposit period.
- Rewards: Members get exclusive rewards every month through MoneyLion’s Share Loyalty Program. With payouts up to $19.99 per month, it’s a program worth exploring! Click here for more information on Lion’s Share.
- Refunds monthly fees: Credit Builder Plus members who are in good standing can add a RoarMoney account and/or a MoneyLion investment account. In turn, MoneyLion will refund the $1 monthly administration fee that comes with those accounts, which is just another way Credit Builder Plus helps you get more for your money!
Today is the perfect day to work on your credit. Improving your credit score ensures that the rates on your future loans are competitive. The goal is to save more money so that you are putting less money towards interest.
Borrow Instacash to help cover your car payment
We all know the feeling of getting overwhelmed by car expenses. Fortunately, MoneyLion has you covered. Give yourself time to figure out the right plan. MoneyLion’s Instacash will get you the money that you need until you can get your car refinanced.
- No credit check
- Up to $250 in minutes
- No monthly fee
- No interest
- Secure, easy, and fast process
- No impact on your credit
Access Instacash from MoneyLion for better peace of mind today. And remember, you don’t have to be locked into a loan until it’s paid off! You have options. MoneyLion will walk you through the process of refinancing and trading in your car.