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Rolling over your car loan is the process of adding the negative equity, or remaining car loan balance, of one vehicle loan into your next. If you are trading in your car but still have a current balance, dealers may offer to roll your previous balance into your new vehicle. This is not a good idea, as it carries the risk of becoming upside-down on your loan for an extended period, and it’s best to first consider alternatives.
Rolling over your car loan increases the negative equity of your vehicle, making it more difficult to sell or trade and increasing the likelihood of becoming upside-down on your loan.
What is the risk of rolling over your current loan?
By rolling over your current loan you are increasing the balance that you owe, as this balance increases you are more susceptible to owing more on your loan than your car is actually worth, also known as being upside-down on your loan. On top of this, your monthly cost will likely increase as you will be paying for more than just your new vehicle.
Being upside-down on your loan isn’t always an issue, especially if you plan to keep your car for the long haul. But if you go to sell your new ride and are under-water, you may be left paying the difference.
Think of it this way, the moment you drive off the dealer lot your vehicle loses value through depreciation. So when you add another loan onto your already existing depreciating vehicle, the problem worsens. By rolling over your current loan you will be responsible for both the amount remaining on your first loan and the value of your new vehicle.
Alternatives to rolling over your car loan
Before agreeing to roll over your car loan, it is first wise to consider other options. Here are some alternatives to keep your financial health in a more positive spot.
- Pay off your current loan first. The best option to take is to pay off your current loan before signing off on a new vehicle. This will ensure that costs are not building off of one another and you will lower your risk of becoming upside-down. There are many ways to pay off your loan faster, like refinancing or removing unnecessary add-ons.
- Buy a used car. If you must purchase another vehicle immediately, consider buying used. Although there is still the risk that comes with any loan rolling into a previous one, you will likely finance it for less, thus lowering any building debt.
- Sell your vehicle privately. To get rid of your current car, consider selling it privately rather than trading it in at a dealership. You will likely make more money this way and then can have more to put down on your next car.
How to avoid the need to roll over your car loan
Remember the following tips when financing future vehicles.
1. Buy a less expensive vehicle
To avoid paying off a car for longer than you want it, use a car loan calculator to find how much you can afford prior to setting out on vehicle shopping and check out Bankrate’s choices for the best value vehicles.
2. Understand negative equity
Negative equity is when you owe more than your car is worth. Take advantage of a calculator to understand what your car payments would become if you did roll your equity into your next vehicle loan.
3. Lease instead of buying
If you’re not fond enough of a car to keep more than a few years, you may want to consider leasing. Typically, leasing costs less per month than buying an equivalent car. However, you’ll be subject to mileage limits and there are fees you’ll have to pay at the end of the lease.
The bottom line
While the need for a new vehicle can be unpredictable, if possible it is best to avoid rolling over your current loan into a new one and wait to buy your next one. Rolling over your car loan is a huge financial risk that could mean taking on more debt, which can impact your finances outside of just your auto loan.