Why You Shouldn’t Renew Your Car Loan


kate_sept2004/Getty Images

Rolling over your car loan is the process of adding negative equity, or the remaining car loan balance, from one car loan to the next. If you are trade in your car but you still have a current balance, dealers may offer to transfer your previous balance to your new vehicle. This is not a good idea, because it risks becoming Upside down on your loan for an extended period, and it is best to consider alternatives first.

Why is renewing a car loan a bad idea?

Deferring your auto loan increases the negative equity in your vehicle, making it harder to sell or trade in and increasing the likelihood of your loan reversal.

What is the rollover risk of your current loan?

By rolling over your current loan, you increase the balance you owe, as this balance increases you are more likely to owe more on your loan than your car is actually worth, also known as being upside down on your ready. On top of that, your monthly cost will likely go up because you’ll be paying more than your new vehicle.

Being upside down on your loan isn’t always a problem, especially if you plan on keeping your car for the long term. But if you’re going to sell your new vehicle and you’re underwater, you may have to pay the difference.

Think of it this way, the moment you leave the dealer lot, your vehicle loses value through depreciation. So when you add another loan on your already existing impaired vehicle, the problem gets worse. By rolling over your current loan, you will be responsible for both the amount remaining on your first loan and the value of your new vehicle.

Alternatives to renewing your car loan

Before agreeing to renew your car loan, it is first wise to consider other options. Here are some alternatives to keep your financial health in a more positive position.

  • Pay off your current loan first. The best option to take is to pay off your current loan before signing on for a new vehicle. This will ensure that costs don’t pile up on top of each other and you reduce the risk of getting upside down. There are many ways to pay off your loan fasterAs refinancing or remove unnecessary add-ons.
  • Buy a used car. If you need to buy another vehicle immediately, consider buy a second hand. While there’s always the risk that comes with any loan that rolls over to a previous loan, you’ll likely finance it at a lower cost, reducing any construction debt.
  • Sell ​​your vehicle privately. To get rid of your current car, consider sell it privately rather than trade it in at a dealership. You will probably make more money this way and then you can have more to put down on your next car.

How to avoid having to renew your car loan

Remember the following tips when financing future vehicles.

1. Buy a cheaper vehicle

To avoid paying off a car for longer than you want, use a car loan calculator to find out how much you can afford before you jump into buying a vehicle and check out Bankrate’s picks for the vehicles at the best price.

2. Understanding negative equity

Negative equity is when you owe more than your car is worth. Enjoy a calculator to understand what your car payments would be if you rolled your principal into your next car loan.

3. Rent instead of buy

If you don’t like a car enough to keep it for more than a few years, you might want to consider renting. Usually the rental costs less per month than buying an equivalent car. However, you will be subject to mileage limits and you will have to pay a fee at the end of the lease.

The bottom line

While the need for a new vehicle can be unpredictable, it’s best, if possible, to avoid rolling over your current loan to a new one and waiting to buy the next one. Deferring your car loan is a huge financial risk that could mean taking on more debt, which can impact your finances outside of your car loan.


Comments are closed.