Should I Roll My Old Car Loan Into My New One?

couple signing car loan paperwork
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Maybe you need a newer, more reliable car. Or perhaps you need a bigger car. For whatever reason, you’re considering trading in your current car for a newer one–but you still owe money on your old car. As a result, you may be wondering how to deal with your existing car loan and your current car.

It is common for people to trade in their old car when purchasing a new car, then roll that old loan into the new one.

But you should carefully consider your options before taking this route. Below, we explain several factors to consider before rolling your old car loan into a new one.

Dangers of Rolling Your Old Loan Into a New One

The biggest danger of rolling your old loan into your new one is that you could end up owning more on the loan than your car is worth, also called being upside down on the loan. This can make selling your car even more difficult in the future

If you buy a new car, you are automatically upside down on the loan since the car depreciates as soon as you drive it off of the lot. When you add in your other loan, then you compound the problem. Consider buying a used car, or even paying in cash.

Remember That the Salesman’s Goal is to Make a Sale

It’s also important to remember that a car salesman’s job is to talk you into buying the car on the lot. When you remember that, it will help you realize that every deal they offer you may not be quite the deal that you think you are getting. Before you even start shopping for a car you should determine if you want a new or a used one.

Try Selling Your Car First

You can often get more money for your car if you do a private sale. This is not a complicated process, and you can use the money to pay off your current loan.

If you still owe money on the car loan once you sell it, you will then need to contact your bank and work out a way to transfer the loan into an individual loan or come up with the money to pay the difference. Then once you sell the car, you will transfer the title over to the new owner.

Alternatives to Trading in Your Car

The best option when you need to purchase a car is to pay entirely in cash. However, that may not always be possible for everyone.

But even if you have to finance the car, you can make sure you do it the right way. For example, when you decide to buy a new car, you need to make sure that you can afford the payments.

One of the most common issues people run into when buying a new car is that they stretched too much and bought a car they can’t afford. As a result, their monthly car payments are too much and are causing them to struggle financially.

Before you even go car shopping, you should determine how much you can afford to pay each month, keeping it so your total debt load (including your rent and house payment) is less than 30% of your monthly income. Ideally, you should be able to pay off your car in three years.

Try Finding Financing Through a Local Credit Union or Bank

Additionally, you may be better off if you find your own financing for the car, rather than use the dealer financing. You may be able to find a better interest rate, particularly if you are buying a used car.

Credit unions and small banks often offer better interest rates on car loans to repeat customers.

You can contact the credit union to get pre-approved before you begin car shopping. This will let you know what your price range should be.

Negotiate the Best Possible Price

Don’t be afraid to negotiate the price with the car dealer before you buy the car. Prices of cars are negotiable, and you may be able to negotiate the down payment amount, interest rate, or other terms.

Some car companies will even offer you a lower interest rate if you buy a new car, and you may think this is the best option because you will save interest on the loan amount. However, a car takes the biggest depreciation in value the first three years of its life. You may end up losing as much in resale value as you would save in interest when buying a used car, so be sure to do the math before signing on the dotted line.

Avoid an Impulse Purchase

Another important factor to consider when purchasing a car or considering rolling your old car loan into a new one is to not get caught up in the moment when buying a car.

Before going to the dealership, research cars at home beforehand, taking into account factors like price, reliability, and whether a new or used model better fits with your lifestyle. And take a day or two after you go car shopping to make your final decision.

Finally, make sure that you really can afford the payment you are making. You do not want to end up regretting the purchase for a long time or being stuck with a car payment you really can’t afford.

And next time, try saving up cash to buy your car outright.

 Updated by Rachel Morgan Cautero.