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5 Things to Consider When Rolling Your Car Loan Into Your Mortgage

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Rolling your car loan into a new mortgage is an alternative if you want a new vehicle but are not yet done paying off your existing car loan.

A rollover loan means that you are paying two loans at once: the balance on the old car, plus whatever money you're financing on the new car. In most cases, that means the total financed already is more than the car is worth and you're upside down again.

It's a common practice to trade in the current car when purchasing a new car. If the current car is not yet paid off, some lenders offer to roll the current car loan into the new one.

While this seems a convenient process, you should carefully consider your options before heading this route. If you’re not careful, the rollover loan could significantly increase your payments and the amount you are paying for the vehicle.

Here are five factors to consider before rolling your current car loan into a new mortgage:

1. Compounding Interest

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 on the loan or owing more than it is worth. 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.

2. Affordability

Will the new car loan be more or less than your current rate? If it's more, does the decrease in interest that you'll pay on your non-mortgage debts outweigh the increase in the mortgage interest you'll end up paying?

A lot of people take out car loans that they can't really afford. Most lenders do not care about their buyers’ other finances, as long as they have proof of regular income source. As a result, the borrowers' 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.

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3. Alternatives

Instead of rolling your existing car loan into a new one, why not sell your old vehicle and use the money to pay off your existing car loan instead?

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.

If you have to get a new car, look for incentive deals like rebates which will offset the difference in what you owe versus what they will pay. Use this as a last resort.

4. Penalties

Some car loans may come with a prepayment penalty, a fee that you'd be charged if you paid off your loan early and a penalty for breaking your current mortgage. There may also be legal fees involved. In some cases, your property might need to be assessed, and that will cost you, too.

Be sure to read the terms of your car loan carefully. If your loan includes this fee, consider whether the financial benefits of paying off your car loan early outweigh the cost of this fee.

5. Negotiability

Even if you’re rolling over your loan to a new one, you can negotiate with your lender for the interest charge, as well as for the down payment amount and terms of the loan. You can also negotiate the price with the car dealer before you buy the car.

Negotiate aggressively with the lender on the trade-in price for your car. Let them know that paying off your old loan at the total amount that you owe is a term of the new deal, or you will not buy the new car.

If you hate to haggle, check the car prices at a no-haggle dealer shop 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.

Rolling over a loan is a convenient way to buy a new car, but your monthly payments will be higher because you will not only be paying interest on the new loan but also on the balance of what you owe on the previous car. Before taking this path, always review the terms of your current loan and the new loan to avoid the negative consequences.

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