Car loans can help make car ownership a reality. But there may be times when your loan terms no longer make financial sense. In that case, you have a couple of options: refinance your car loan or buy a new vehicle.

While these can both provide a path to new loan terms, they solve different problems. In general, refinancing may make sense if you want to keep your car but access better terms. Meanwhile, purchasing a new vehicle and taking out a new loan can help you access a new-to-you car in addition to securing new loan terms.

Here’s what you need to know to choose between refinancing your car loan and purchasing a new vehicle:

Refinancing a car loan: what you should know

Auto loan refinancing involves taking out a new loan to pay off your existing loan. People often refinance to lower their interest rate or monthly payment.

When auto loan refinancing may make sense

Refinancing a car loan can be helpful if it leads to a better financial situation. If your credit has improved or rates have dropped since you took out the loan, you may be able to qualify for a better interest rate. Refinancing can also make sense if you want to change other terms of your loan, such as reducing your monthly payment or dropping a co-borrower.

Just keep in mind that your loan shouldn’t be too close to its payoff date, or else the typical fees associated with refinancing may reduce — or even wipe out — your potential savings.

Pros and cons of refinancing a car loan

Refinancing your car loan can come with several benefits. For example, a lower payment could give you more financial flexibility from month to month, while a lower interest rate could potentially reduce the overall cost of your loan.

At the same time, however, there can be drawbacks to refinancing an auto loan. Taking out a new loan typically means paying fees, such as origination and late fees. If your existing loan lender charges a prepayment penalty for paying off the loan early, you’ll have to add that to the cost of refinancing as well. If you opt to extend your loan term in exchange for lower payments, you may wind up owing more interest overall. Finally, if your vehicle’s value is relatively low, refinancing could mean you’ll owe more than it’s worth, depending on your terms.

Buying a new car instead: what you should know

Another way to change your auto loan is to sell or trade in your vehicle, buy a new car and take out a loan with new terms. That way, you can change both your loan terms and your car.

When buying new may make sense

For some people, a new car is going to make much more sense than sticking with their existing one. If you want to lower payments, but you can’t get the deal you want with refinancing, trading it in for a less expensive car may help. You may also want a new car if your car needs expensive repairs, is unreliable or if your commuting needs have changed.

Buying new can also let you access new tech or safety features.

Pros and cons of buying new

Buying a new car means you may be able to access a car with newer features, fresh warranties and switch to a make or model that has better safety ratings or is a more reliable brand than your existing car. Depending on the vehicle, you may find a manufacturer that offers incentives, like rebates or low-rate financing, that can also provide savings.

If you have a lot of equity in your car, your new lender can pay off your existing loan and put that extra value toward your new vehicle purchase price. That means a potentially better car for a lower loan amount.

However, there can be drawbacks to purchasing a new vehicle and taking out a new car loan. For example, you may pay more for a new vehicle. New cars also experience more rapid depreciation, so that’s another factor to consider.

Key questions to decide between refinancing and buying new

There are a few questions that can help you decide between these two options:

·       How much equity do you have in your car? If you owe more than your car is worth, it may be difficult to find a lender who will refinance your loan. If you decide to trade in your car, you may have to either pay off your loan first or roll that negative equity into your new loan.

·       What can your budget support? With either option, you’ll have to commit to a new monthly payment amount. It’s also important to consider outside factors if you opt for a new car, like your insurance premiums, fuel and maintenance.

·       How long do you plan to keep your car? If you want a car that can stick around for years to come, it may make sense to opt for a new vehicle that’s in better shape than your current car. Or, if you want to save up for a new car in the near future, refinancing may be the better option.

Buying new and taking out a new loan or refinancing an existing car loan can both help pave the way toward a better financial future. Once you decide, you can move forward with confidence as you pay off your car loan.

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