Refinancing and trading in a vehicle are two popular options for Canadians that want to change their current loan duration, monthly payments and interest rates.
The average lifespan of a car loan is typically 10 years, and when most Canadians apply for auto loans, they’re getting approved for terms that are up to 72 months long. Owning the same car for six years is doable, but the car you have in your 20's might not be the car you need in your 30's. As well, a person’s financial situation will most likely change over the years. Personal income varies, emergency financial situations arise, and sometimes location of residency shifts – these are all factors that could impact how you manage your car loan.
Canadians currently financing a vehicle have options if they’re knee-deep in a car loan and want out. Refinancing and trading in a vehicle are two popular ways how you can enter a new agreement with a current loan. Although refinancing and trading in a vehicle might seem like processes that generate a similar outcome, they’re specific to the circumstances of the borrower. Refinancing differs greatly from trading in a vehicle and both come with a set of advantages and disadvantages. If you’re financing a vehicle and looking to either refinance or do a trade-in, here’s how you can tell which option is best for you.
READ MORE: 4 Tips to Getting A Car Loan with Bad Credit
Refinancing a vehicle means replacing your current car loan for one with different terms. With refinancing, you keep the car but apply for a new loan agreement that has rates more suitable to your financial situation. A secured loan that is typically applied for through a new lender, refinancing is usually done by people who are looking to lower their monthly payments, change interest rates or adjust their current term length. Another popular reason why Canadians might choose to refinance is to remove a cosigner from their loan contract. It’s common for a borrower to apply for a refinance loan to save money, but that’s not the only reason why a person might decide to refinance. If you’re approved for refinancing with a new lender, your term duration, monthly payments and interest rates will be different.
If a person is applying for refinancing, there’s a good chance they’re hoping to either extend or shorten their current loan duration. Extending a loan length can lower monthly payments and interest rates, as an extended loan adds more months to the overall agreement and stretches out the cost of debt. Some people, however, apply for refinancing with shorter loan duration. Typically, borrowers who want to shorten their loan length want to pay off the loan more quickly. An extended term might increase the amount of money paid for the loan, whereas a shortened term might increase the monthly payments, but in the long run reduce the amount of overall interest paid. Regardless the loan duration you’re looking for when refinancing, choosing what is convenient for you will only benefit your finances down the road.
There’s no timeline on how soon you can apply for refinancing after you get an auto loan. It’s a flexible option for Canadians who want a new loan agreement due to financial reasons or any recent changes that might impact how you manage your car loan. When it comes to new auto financing, it’s important to shop around to ensure that you’re getting the best rates available to your specific situation. Refinancing can be a great option, but keep in mind these three refinancing disadvantages:
1. If you decide to extend your loan, you could be paying more money for interest and fees over the course of the term
2. Refinancing an older vehicle might be a waste if the car might not survive the length of the loan
3. You could be hit with transaction fees on new refinanced loans or from your original lender
A trade-in, different from refinancing, is a process that entails switching your current vehicle for one that better fits your lifestyle. A lot of people who are looking for a new vehicle will often try to sell their car organically online or through friends or family members, but trading in a vehicle is a common occurrence that dealerships are often always happy to do, as it creates more used inventory for them. Car dealerships handle the details of a trade-in, which can make it one of the easiest ways to get rid of your old car and driving in a new one.
When trading in a vehicle, your auto loan doesn’t disappear. As well as lifestyle changes, a lot of Canadians decide to trade-in their vehicle for lower rates. Trading in your vehicle means being about to get a less expensive car with lower monthly payments and interest rates. The first step to knowing what you’re eligible for with a trade-in is understanding how much your current vehicle is worth. With a trade-in, your car’s worth and the outstanding balance that you have on the loan are the two factors that will influence your trade-in. Depending on the equity of your old car, the dealership may or may not be willing to pay off the remainder of your new loan. What you owe for your loan and the value of your car will be added to your new vehicle.
When a car dealership decides to do a trade-in with you, you’re obligated to get your new car from them, so make sure they have exactly what you’re looking for before you agree to trade. Car dealerships are known for trading in vehicles with reasonable prices, but it’s always good to prepare for negotiation and shop around before you sign the dotted line.
Like refinancing, there’s no time limit on when you can or cannot trade-in your vehicle. It’s important to note that not all people who trade-in look for cheaper options. Those who have worked hard over the course of their loan and who have been able to save money and rebuild their credit during the process are able to trade-in their car for a vehicle that is nicer then their trade-in, with better rates and greater value. As easy as trading a vehicle in can be, don’t ignore the potential disadvantages that could come along with it:
1. You could get less money than what you expect for your traded vehicle
2. Your choices for a new car are limited to the dealership that you trade with
3. The price a dealership gives you for a trade-in might not always be fair
Regardless of the route you take when it comes to trading in your vehicle or refinancing, do your research to avoid all potential disadvantages! If you’re ready to trade-in your vehicle for one that better fits your lifestyle and your budget, apply with Canada Drives for free right now to see what you could be eligible for!
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