If you’re planning to trade in your current vehicle for a new one, but you’re still paying off the loan, a car dealer may suggest rolling over your old car loan into a new one. Before you agree, there are some drawbacks to rolling over a car loan you should carefully consider.
Understanding when and how rollover financing works can help you decide if it’s a smart solution or if alternative strategies — like traditional refinancing or negotiating with your lender — are better for your financial health.
Keep reading to learn more on rolling over a car loan, including how it works, how much negative equity you can roll over, and alternatives to rolling over a car loan.
Key Points
• Rolling over a car loan means transferring the remaining balance of your current auto loan into a new loan, often with a new or extended term.
• Common reasons include lowering monthly payments, extending the loan term, or getting a better interest rate.
• Rolling over a car loan can result in paying more interest over the life of the loan due to a longer repayment period.
• Rolling over a car loan can affect your credit score, especially if it involves taking on a new loan or extending the term, which can increase your debt-to-income ratio.
• Before rolling over a car loan, shop around for the best rates and terms, and negotiate with lenders to ensure you get the most favorable conditions.
How Does Rolling Over a Car Loan Work?
When you trade in your car, you take your car to a dealership where they will offer you a dollar amount to put toward a new vehicle.
But if you haven’t paid off your old car loan, you don’t actually own your car — your lender holds the car title. In order to trade in the vehicle, you’ll need to pay off your old loan. If you don’t have the money to do that, the dealer might suggest rolling over the car loan instead.
Rolling over a car loan is when you combine the amount you owe on your current auto loan with a new loan for a new car. However, this increases the amount you owe since you are essentially combining the loans. It may result in negative equity, which is when the amount you owe on the loan is more than the car is worth.
Recommended: How to Sell a Car You Still Have a Loan On
How Much Negative Equity Can You Roll Over on a Car Loan?
How much you can roll over on a car loan typically depends on the amount of negative equity you have with your current car. For instance, long-term auto loans may lead to negative equity, as might excessive wear and tear on the car that causes its condition to deteriorate.
So how much negative equity can you roll over? Generally, the more negative equity you have, the harder it may be to roll over on a car loan.
Lenders often use a loan-to-value ratio (LTV) to help them set a maximum loan amount. Many lenders won’t extend loans that are more than 125% of a car’s value. If you exceed that, you may not qualify for a loan.
Pros and Cons of Rolling Over a Car Loan
Before deciding to roll over your car loan, it’s important to carefully weigh the advantages and disadvantages.
Pros of Rolling Over a Car Loan
The possible benefit of rolling over a car loan is that you’ll get a new car. If your current car is in poor condition or needs costly repairs, this could be an option for you. But you may risk going further into debt since you’ll have to pay what you owe on your current loan in addition to what you’d owe on the new one.
Cons of Rolling Over a Car Loan
The biggest drawback of a rollover car loan is that you’ll owe more money on the loan than your new car is worth, a situation known as being upside down on your loan. This can be a financially precarious position to be in and could put you even further into debt.
In addition, if your car is in an accident and gets totaled, your insurance company will likely pay only the amount equal to your car’s value. If you owe more than that amount, you’ll be out of a car and you’ll need to find a way to pay off the loan.
Finally, rolling over a car loan to create a larger loan amount means that you’ll pay more in interest on the car loan over its term. That can make rolling over a car loan an expensive proposition.
Recommended: Refinancing a Car Title Loan
Alternatives to Rolling Over a Car Loan
Because rolling over a car loan can be financially risky, many experts suggest avoiding it, if possible. Here are some other options to consider instead.
Paying Off Your Existing Loan
If you don’t need a new car immediately and you have some savings, consider using the money to pay down your current auto loan so that you no longer owe more than the car is worth. This could get you to a point of positive equity, which means you could trade in your car for a new one without having to do a rollover.
For instance, if your car is worth $16,000 and you pay down the loan enough so that you owe $14,000, the dealer would give you $2,000 when you trade in the car. You could use that amount as a down payment on the new car, which means you wouldn’t have to borrow as much with a new loan.
However, think twice about using your savings if it will wipe you out. It’s important to have enough savings in the bank in case of an emergency.
Recommended: How Do Title Loans Work?
Refinancing Your Car Loan
When refinancing an auto loan, you take out a new loan, ideally with a lower interest rate or better terms, and pay off the old loan. A loan with a lower interest rate could lower your monthly payment, which could help your budget. And as you repay the new loan, you could work toward building positive equity in the car.
Generally, the higher your credit score, the lower the interest rates you may qualify for when you refinance a car loan. If you’ve recently built your credit, this could be a good time to consider refinancing.
Recommended: Pros and Cons of Car Refinancing
Sell Your Car Privately
The trade-in value of your car at a dealership is likely to be much less than the amount you could get if you sold the car on your own. Selling the car yourself could result in a greater profit for you, which you could use to help pay down your old loan. And if you don’t want to buy a new car right away, you might even consider leasing a car in the meantime. Do the math to see what makes the most sense for you financially.
The Takeaway
Rolling over a car loan could leave you in a precarious financial situation. If possible, try to avoid a rollover car loan and explore other options instead. For instance, you could sell your car privately or refinance the vehicle to help pay off your previous loan and get a new loan with better terms.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
How do I roll over a car loan to a new one?
A dealer may offer you a rollover loan when you trade in a car with negative equity, meaning you owe more on the loan than the car is worth. The rollover loan will essentially combine the balance from your old loan with your new loan. A rollover loan can be financially risky because it leaves you with more debt to pay off.
How much negative equity can you roll over into a new car?
The more negative equity you have, the harder it may be to roll over on a car loan. Many lenders won’t give car loans that are more than 125% of the value of the new car. If you exceed that, you may have trouble qualifying for a loan.
What is the downside of rolling over a car loan?
The downside of rolling over a car loan is that you will owe more money on the loan than your car is worth. This exposes you to possible financial risk. Plus, by rolling over a car loan, you end up with a larger loan amount, which means you’ll pay more in interest over the life of the loan.
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