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 current car. As a result, you may be wondering how to deal with your existing car loan.
It's common for people to trade in their current car when purchasing a new car, and, if the current car is not yet paid off, the dealer offers to roll the current car loan into the new one.
While many people do this, you should carefully consider your options before taking this route. Consider several factors before rolling your current car loan into a new one because this could significantly increase your payments and the amount you are actually paying for the vehicle.
Finding Financing on Your Own
Most dealerships have partnerships with banks, allowing them to create auto loans at the time of sale. While convenient, there are dealerships who will not have the best loan rates or are predatory with certain age groups or consumers.
Credit unions and smaller banks often offer better interest rates on car loans. You can contact your credit union or bank to gain pre-approval before you begin car shopping. This gives you a budget to stick to and will relieve some of the hassles of dealing with car salespeople.
Alternatives to Trading in Your Car
Try selling the car yourself first. You may be able to receive 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 towards any amount leftover on the loan. There are many websites for selling used cars available.
If you will still owe money on the car after you have sold it, you should contact your bank before selling it to inquire about transferring the loan to a personal loan, or work out an arrangement with them.
Once you sell the car, you will transfer the title over to the new owner by filling out the transfer of ownership portion on that is on the back of most vehicle titles.
Payment Methods During a Personal Sale
You should ask for either cash or a certified cashier's check from a financial institution when you are agreeing upon payment. Personal checks, bank transfers, and other methods are easily manipulated, and often used in scams.
If you need to purchase a car, the best option is to pay entirely in cash. With cash, you are usually able to negotiate even lower prices with dealers because they know they are going to receive the entire amount. Unfortunately for most people, this is not realistic given the price of most cars.
You might find your own method of financing a car. Most dealerships have partnerships with banks, allowing them to create auto loans at the time of sale. While convenient, there are dealerships who will not have the best loan rates or are predatory with certain age groups or consumers.
Credit unions and smaller banks often offer better interest rates on car loans, without predatory practices. You can contact your credit union or bank to gain pre-approval before you begin car shopping.
Once you have a pre-approval, you have an amount you can spend and budget to stick to. This will relieve some of the hassles of dealing with car salespeople. Be sure to not mention how much you have available to a car salesman—that will become the price they are looking to settle on.
Choose a price below the pre-approved amount, so that you will be able to cover the cost of taxes, tags, and title with the rest of your loan. These three costs can be significant as well, so you could reduce initial costs by paying for them with your loan.
You could extend your use of the car. Use your car until it is no longer feasible to repair it, or when repair costs exceed the value of the car.
Negotiate the Best Possible Price
Don’t be afraid to negotiate the price with the car dealer before you buy the car. Car prices are definitely negotiable, and you may also 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 and compare them to see who 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.
Dangers of Rolling Your Current Car Loan Into a New One
The biggest danger of rolling your current car loan into a new loan is that you could end up owing more on the loan than your car is worth. You will more than likely still be able to sell that car in the future, but the chances of recuperating your losses are very low.
If you buy a new car, you are, automatically, upside down (you owe more than it is worth) on the loan. The car depreciates as soon as you drive it off the lot since it is no longer considered new. When you add in your current loan, you compound the problem.
As you continue to not pay off car loan balances and roll them into new loans, you can find yourself thousands of dollars in debt over the amount a car is worth.
For example, if you financed a car for $26,000 with no down payments, and you managed to get a low-interest rate of 3% with financing for 48 months, you might be looking at payments of about $575 per month. The total loan value (interest added) is close to $27,623.
If you sell the car three years later, you ended up paying $20,700 on it, leaving $6,923 on the loan. If you sell the car to a dealer, they will want to make money on it as well, so a generous dealer might give you $10,000 for it. Your new car costs $26,000 as well, and you received the same rates as before on your new loan.
If you made no down payment, your new car now costs you $32,923 (with your leftover loan amount included), unless you apply that $10,000 as a down payment—in which case you now owe $22,923 in a four-year loan, with monthly payments of $507.
So you paid $20,700 on the first car, and now owe $22,923 on the second. You can see there is no getting ahead in this scenario.
One of the most common issues people encounter is buying a car they can't really afford. Dealerships do not care about your other finances, as long as you can show you can make your payments.
As a result, people's monthly car payments can be too high, causing them to struggle with other financial obligations. Before you go car shopping, determine how much you can afford to pay each month, keeping your total debt load (including your rent and house payment) at less than 30 percent of your monthly income. Ideally, you should be able to pay off your car in three to four years.
Many people go to look at cars and are talked into impulse purchases. Avoid this by bringing someone with you to talk you out of it, or be determined not to buy until you can think about it. Know that salesmen are there to sell, and will want you to buy something right now. Stick to your agenda, and you will not fall for their hard-selling tactics.
Frequently Asked Questions (FAQs)
How soon can you refinance a car loan?
There aren't any specific rules about how soon you can refinance after taking out an initial auto loan. It will depend on whether your lender has any prepayment penalties and how comfortable you are having your credit score hit with another inquiry sooner rather than later. Weigh any fees and penalties against what you might save in interest by refinancing.
How can I pay off my car loan faster?
There are several ways you can work to pay off your car loan more quickly. You can start making payments every two weeks instead of once a month, for example, or increase the amount of principal you're paying each month. If you get a large tax refund, you can make a one-time payment to lower your balance. Any of these methods will shorten the life of your loan and lower your total interest paid.
How do I get out of an upside-down car loan?
Cars depreciate quickly, and it's not uncommon for borrowers to end up owing more than what their car is worth. If you find yourself in this situation, don't panic. You can try making extra payments to bring your balance down, reaching out to your lender to negotiate or refinance, or selling your car altogether to pay off a majority of the balance.