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

Car loan
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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's common for people to trade in their old car when purchasing a new car, and if the old car's not yet paid off, the dealer offers to roll the old loan into the new one. But you should carefully consider your options before taking this route. This could get you into financial hot water, and there are 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 owing 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 the lot. When you add in your other loan, then you compound the problem. To avoid this, consider buying a used car, or even paying in cash.

The Salesman Wants a Sale

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. If you do have to finance the car, though, make sure you can afford the payments in your budget with room to spare.

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 couldn’t really afford. As a result, their monthly car payments are too much and are causing them to struggle financially.

Before you even go car shopping, 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 percent of your monthly income. Ideally, you should be able to pay off your car in three years.

Getting Financing On Your Own

You may be better off if you find your own financing for the car, rather than using 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, especially to repeat customers. You can contact the credit union to get pre-approved for a certain amount before you begin car shopping. This will help you decide 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 definitely negotiable, and you may be able to negotiate the down payment amount, interest rate, or other terms. If you hate to haggle, check the car prices at a no-haggle dealer such as CarMax and compare them to check if they can offer you the best price.

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 hit of depreciation in its value over 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, taking into account factors like price, reliability, equipment options, gas usage and whether a new or used model better fits with your needs and lifestyle. Take a day or two after you go car shopping to make your final decision.

Finally, make sure that you can truly swing 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. For your next vehicle, try saving up cash to buy your car outright.