Refinance vs. Trade-In: Which Saves You More Money?
If your current car payment feels too high, you might be asking: should I refinance or trade in my car? Both options can lower car payments, but they work differently, and choosing the wrong options could cost you more over time.
When trying to save money on your car loan, there isn’t a one-size-fits-all answer. The best choice depends on your loan, your vehicle’s value, and your long-term financial goals. Here’s how to tackle the refinance vs. trade-in car decision.
Option 1: Refinancing Your Car Loan
Refinancing means replacing your current auto loan with a new one, ideally with a lower interest rate, a different loan term, or both. For many drivers, refinancing is one of the simplest lower car payment options because it doesn’t require buying another vehicle.
Refinancing may make sense if:
- Interest rates have improved since you got your loan
- Your credit score has increased
- You want a lower monthly payment
- You’re happy with your current vehicle and plan to keep it
Depending on your situation, refinancing can help you save money on your car loan interest over time or free up room in your monthly budget with a lower payment. The key is comparing the total cost of the new loan—not just the monthly payment. Extending the loan term can reduce payments but may increase the total interest paid.
Option 2: Trading In Your Vehicle
Trading in means using your current vehicle as part of the purchase of another one. The dealer applies your car’s trade-in value toward your next vehicle.
This option may make sense if:
- Your current vehicle no longer fits your needs
- Repair costs are becoming expensive
- You have positive equity that can be used as a down payment
Your car equity trade-in matters here. Equity is the difference between what your car is worth and what you still owe on the loan. If your car is worth more than your payoff amount, that equity can reduce how much you need to finance on your next vehicle.
Refinance vs. Car Trade-In: A Real Cost Comparison
Let’s consider refinancing vs. trading in your car in a real-life situation and examine how it can save money on your car loan. Imagine you owe $22,000 on your current loan at 9% APR, with a monthly payment of $510.
If you refinance:
- New rate: 6% APR
- Similar remaining term
- New payment: about $425 per month
That’s roughly $85 in monthly savings. Depending on your new loan terms, you could also pay less in interest over the loan’s lifespan.
If you trade in:
- Your vehicle is worth $20,000
- You still owe $22,000
- The remaining $2,000 is rolled into your next loan
While this option may lower car payments if you purchase a less expensive vehicle, you’re also financing the remaining balance from your previous loan. That can increase the total amount you owe on your next vehicle.
Should I Refinance or Trade-In If I’m Upside Down?
Also called negative equity, being “upside down” means you owe more on your loan than your vehicle is currently worth. Negative car equity in a trade-in can make this option more expensive because the unpaid balance is often added to your new loan, meaning you’ll pay interest on both the new vehicle and the old debt.
In some situations, refinancing may still be available—even with some negative equity—and could lower your payment while you continue paying the balance. Check our blog on refinancing upside-down loans to learn more.
Refinance vs. Trade-In Your Car: A Decision Framework
When comparing the options to refinance vs. trade-in your car, ask yourself these questions:
- Do you like your current vehicle? If yes, refinancing is often worth exploring first.
- Has your credit improved? Better credit may qualify you for a lower interest rate.
- Do you have positive equity? A strong car equity trade-in can make buying another vehicle more affordable.
- Are you upside down on your loan? Refinancing may help you manage payments while building equity instead of rolling debt into another loan.
- Have you compared the numbers? A trade-in vs. refinance calculator can help estimate monthly payments and total loan costs before you decide.
The right option for your situation should cost less overall and fit your long-term financial goals.
Find Out How Much You Could Save
If you’re wondering, “Should I refinance or trade-in my vehicle?” start by seeing what refinancing could do for your current loan. Gravity Lending helps drivers nationwide compare personalized refinance offers from trusted lending partners with no hidden fees, making it easy to explore ways to save money on car loan costs without the pressure of buying another vehicle.
Check your rate today and see whether refinancing could be the smarter financial move for you.