Downgrading Your Car: Trade-In or Refinance—the Best Option

Recently, many car owners find themselves in a predicament where they must decide between trading in a car or refinancing their car loan to lower monthly payments. If you have a car purchased about 8 months ago and feel compelled to downgrade your model, you may be considering these two options. This article will guide you through the pros and cons of each approach and help you make an informed decision.

Timelines and Refinancing

Unless your credit score has seen a drastic improvement in the past 8 months, the most viable way to lower your car payments is to extend the loan term. Refinancing purely on the basis of a shorter term might not be feasible without a notably better credit score. This method might not take into account market and interest rate fluctuations.

Selling Your Car

The most effective solution to your problem, if you want to get out of the current model, is to sell the vehicle. However, selling it outright means you need to cover the amount you owe on the car. It's likely that you are upside down, meaning you owe more than the car is worth in the current market. In such scenarios, the best approach is to save the difference between the car's value and your loan balance before you sell the car.

Trade-In Considerations

If you are considering trading your car in for a different model, this option makes more sense. Refinancing to a lower payment rate is not advisable if the interest rates have increased, and you don't want the current car anymore. It's important to understand that higher interest rates mean higher total costs over the life of the loan.

Homework Before A Decision

Before making a final decision, it's crucial to put in some effort to gather the necessary information. Research the market value of your car, and check whether refinancing could provide a lower payment. You can consult dealers for trade-in value offers and talk to them about the potential savings. Additionally, contacting your current lender to find out the terms of refinancing can lead to a more informed decision. Taking some time to research and consult with professionals can significantly help in making a better decision.

Current Market and Car Values

Given the current state of the used car market, with increased prices, it's wise to call your lender for an actual payoff amount. You should know the exact amount you owe. Use CarMax, KBB, and Carvana for cash offers. While dealers often work on a "buy low, sell high" model, it's important to consider the value of your car and not just trade it. You want to sell it rather than trade it. Also, ask your lender about refinancing. If they offer a lower interest rate and no extended months, it makes sense to refinance. If not, you might be losing money by extending the loan term.

Long-Term Solutions

In normal market conditions, trading in your car means taking a significant financial hit. However, with current market conditions, selling the car at or above the loan amount might be possible. You should wait for the inflated market to stabilize and purchase another car at a more reasonable price. Alternatively, if you can't tolerate this for a few months, you are likely to incur additional costs, such as sales tax and licensing fees, when purchasing a new car.

Remember, the goal is to make a financially sound decision that will benefit you in the long run. Regardless of whether you choose to trade in or refinance, be sure to do thorough research and consult with professionals to make the best choice for your situation.