When one roll over auto loan, the outstanding amount on the old loan will be added to the balance on the new loan. One of the advantages of this method is it frees up the worry about making two loan installments. The borrower only needs to make one loan payment every month, even if they buy a new car. The drawbacks, however, generally outweigh the advantages. Borrowers are mostly underwater on their car loans for an extended period. The loan balance will be higher than the value of the new vehicle. This often results in a further rollover of the auto loan.
Things to Consider
Here are a few strategies to avoid turning upside down on the car loan:
Review the Total Loan Amount
Most people pay monthly, but it’s essential to keep the total cost in mind. Even though an extra $10 or $20 a month might not seem like much, it can add up to $1,440 to the total cost of a loan over six years, which may be significantly more than one had initially planned to pay.
Avoid loans with prepayment penalties to save paying extra if the financial situation changes, and one can pay off the loan sooner. The less interest is paid on a loan, the sooner one starts saving for the next car. The more interest earned on the savings, the faster one can pay off a loan.
Research Car’s Trade-In Value
It is essential to know the current worth of the old car before jumping into negotiations. Some reliable dealers offer free or minimally charged value estimation of the car. One can call several dealerships to check if they offer trade-ins. If it is an undervalued value, one can cite higher estimates and trade-in offers from competing dealers. Going to different dealerships and receiving the offer in writing will make this strategy more effective.
Separate Negotiation for Trade-In and New Car
Dealers may try to increase the price of the new car to compensate for a high trade-in value on the old one. Things become more complicated in the case of a roll over auto loan, where the borrower owes more money than the car is worth. Although a dealer may promise to roll over the unpaid debt into the financing for a new vehicle, it is essential to verify the interest rate on the new loan isn’t higher than the one on the old one.
Clearing Existing Loans Before Buying
If one has money saved up and his/her car is worth less than what they owe, they can use it to compensate for the difference and build positive equity. However, there are certain limitations. To avoid paying the extra money while accelerating the payments, one first needs to check to see whether there is a prepayment penalty. It is essential to ensure that the extra payments go toward the principal, not the interest.
Since cars depreciate quickly, it’s common for borrowers to end up owing more than their vehicle is worth. Instead of panicking in this roll over auto loan situation, people can make extra payments to lenders to reduce the balance and discuss a refinance or bargain. Or if the water is too high over the head, one chooses to sell the automobile to cover the remaining sum.