Why you shouldn’t roll over your car loan
Key takeaways
- Dealerships may offer rolling over your loan as an option when you want to upgrade to a newer or better vehicle, but it is typically not the best choice for your finances.
- When you roll over your car loan, you risk building negative equity and potentially defaulting.
- You can avoid rolling over your car loan by waiting to purchase a different car until your current loan is paid off.
If you have your eyes on a new or new-to-you car, trading in your current model is the most common way of switching rides. But it only reduces your next car’s cost if you have positive equity or owe less on your vehicle than it’s worth.
If you have negative equity, lenders and dealers may offer to roll over your current loan into your new one. While the process sounds convenient, it usually isn’t the smartest move. Rolling over your car loan increases the negative equity of your vehicle, making it much more expensive in terms of interest and monthly payment. It can also make it more difficult to trade in or sell down the line.
How does rolling over your car loan work?
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 that exceeds the trade-in value of your vehicle, dealers may offer to roll your previous balance into your new vehicle loan.
For example, if you have $15,000 left on your auto loan but your car is only worth $10,000, a lender may offer to wrap that $5,000 into your next loan. This will increase the amount you borrow to more than the new vehicle is worth.
Unless you need to, it is often a better financial decision to keep driving the car you have until you pay off your loan. After that, you can sell or trade it in without having to worry about rolling over the loan amount.
The risks of rolling over your car loan
By rolling over your current loan, you increase the amount 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 or having negative equity.
Being upside down on your loan isn’t always an issue, especially if you plan to keep your car for the long haul. However, if you go to sell your new ride and are underwater, you may be left paying the difference between what the car is worth and what you owe.
Think of it this way: The moment you drive off the dealer lot, your vehicle begins to depreciate. Sometimes its value shrinks faster than your loan balance. When you increase the loan’s size, the problem worsens.
On top of this, your monthly cost will likely increase as you will be paying for more than just your new vehicle. You’ll also pay more in car loan interest over time. Unless you can keep the vehicle long enough to pay off your balance or save enough to cover your negative equity next time you change vehicles, you may end up in a cycle of repeatedly rolling your loans over.
Alternatives to rolling over your car loan
Before agreeing to roll over your car loan, 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 is to pay off your current loan before signing off on a new vehicle. This will ensure that costs are not building on one another and 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
Opting for a less expensive vehicle and choosing to lease can be savvy alternatives that help you avoid rolling over your car loan in the future.
1. Buy a less expensive vehicle
To avoid paying off a car for longer than you plan on driving it, use a car loan calculator to find out if you can afford opting for a shorter loan term on a lower-priced vehicle. The longer your term, the more time your vehicle has to depreciate, so choosing a term under 60 months will help you avoid negative equity.
Before you start shopping, check out Bankrate’s choices for the best value vehicles. You can also look at Kelley Blue Book or Edmunds for their estimates on how much a make and model will be worth in a few years.
2. Lease instead of buying
If you typically trade up to a new vehicle before your old one is paid off, you may want to consider leasing. Typically, leasing costs less per month than buying an equivalent car. For example, Experian’s State of the Automotive Finance Market report for 2024’s fourth quarter shows the average monthly payment on a new leased car was $600, compared to the average new car payment of $742.
However, you should know that leasing means being subject to mileage limits you don’t have to deal with when you purchase a car. You may also have to pay fees at the end of the lease depending on the terms and your usage of the vehicle.
Bottom line
While the need for a new vehicle can be unpredictable, if possible, avoid rolling over your current loan into a new one. Wait to buy your next car until after your current loan is paid off.
Rolling over your car loan is a financial risk that could mean taking on more debt, which can impact your finances beyond your auto loan.
