Car Deal Canada

How Rolling Over a Car Loan Works

How Rolling Over a Car Loan Works

Rolling over a car loan involves adding the remaining balance from your old auto loan to a new loan for your next vehicle. This allows you to essentially transfer the unpaid debt to a new car purchase. While it may seem like an easy way to get rid of your old loan, rolling over debt comes with major risks that can leave you even further in debt.


On the surface, a car loan rollover can look attractive. It gives you a straightforward way to trade in your current vehicle and upgrade to something newer without having to come up with extra money to pay off the existing loan first. However, you end up increasing your total debt and interest costs over the long run.


Before agreeing to roll over car loan balances, it is critical to understand the financial implications. A rollover keeps you locked into debt instead of paying off what you owe. And it makes it very difficult to build equity in your next vehicle. If not approached cautiously, rolling over auto loans can create a dangerous debt cycle.

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How Rolling Over a Car Loan Works

Rolling over a car loan involves taking the remaining balance from your old auto loan and adding it to a new loan for your next vehicle. This allows you to essentially transfer your existing debt into a new car purchase. Here’s how it works in 6 steps:

 

  1. You currently owe $15,000 on a car loan with 24 months left.
  2. You go to trade in this car for a new one valued at $10,000.
  3. The dealer gives you $10,000 as a trade-in credit.
  4. But you still owe $5,000 on your old loan.
  5. The dealer offers to roll the $5,000 balance into your new 60 month car loan.
  6. Your new loan principal becomes $30,000 ($25,000 for the new car + $5,000 negative equity).

 

By rolling over the debt, you avoid having to come up with the $5,000 difference. But this also increases the total amount borrowed and interest paid over the life of the new loan.

 

Why Dealerships Promote Car Loan Rollovers

Dealerships often market rolling over loans as an easy solution because it helps them sell more new cars. By absorbing your remaining loan balance into the next purchase, rolling over debt provides dealers with a convenient way to get you into another vehicle right away.

This rollover process is also quite profitable for dealerships. They earn additional interest income on the larger auto loan amounts, especially if they can convince borrowers to stretch out the repayment terms. Dealers also boost their sales numbers and collect various fees on the new car purchase.

While rolling over debt may benefit the dealership, it does not always translate into the best outcome for the car buyer. Taking on more interest costs and a larger loan balance should be carefully evaluated against other options before moving forward.

 

Increasing Total Debt

When you roll over a car loan into a new auto loan, you are increasing the total principal amount borrowed. Any remaining balance from your old loan gets added to the principal for the new vehicle purchase. This immediately puts you further in debt right from the start.

For example, if you still owed $5,000 on your old car loan and took out a new $20,000 auto loan, the total amount financed would be $25,000. That’s $5,000 more in principal than if you paid off the old loan first before buying another car.

In addition, rolled over car loans often have longer terms. Your previous loan may have been a 3-year term, but dealers will typically stretch the new loan to 5 or 6 years after combining the balances. This further increases the total interest paid over the life of the loan.

Between the larger principal amount and longer repayment timeline, rolling over car loans locks borrowers into more overall debt. It becomes very difficult to build equity this way, since so much of each payment goes towards interest instead of paying down the principal balance.

 

Paying More Interest

When you roll over a car loan, you are essentially taking out a new loan for a higher balance that includes your remaining loan amount plus the price of the new vehicle. This means you will now owe interest on that larger loan balance. Even a few thousand dollars rolled into the new loan can result in hundreds of dollars in extra interest paid over the life of the loan.

To make matters worse, the interest rate on your new car loan after a rollover is often higher than your previous rate. Lenders view rolled over debt as higher risk, so you may lose any rate discounts you had before. Going from a 3% interest rate to 5% while also increasing the principal by $5,000 can really add up over a 5-year loan term.

The combination of owing interest on a larger balance and potentially higher interest rates causes interest costs to skyrocket when rolling over car loans. It’s not uncommon for total interest paid to double after a loan rollover, compared to keeping your original loan.

 

Difficulty Building Equity

One of the biggest risks of rolling over a car loan is that it can make building equity in your vehicle much more difficult. Equity represents the portion of the vehicle value that you actually own. When you first purchase a car, you likely have little to no equity if you took out a loan for most or all of the purchase price.

As you start making payments over time, you progressively gain more equity as the loan balance goes down. Each payment allows you to “buy back” a portion of the vehicle from the lender. With regular payments on a typical auto loan term, you may have 20-30% equity after a couple years.

However, rolling over a loan locks you into a cycle of debt that prevents you from building meaningful equity. Each time you roll the balance into a new loan for another car, your loan-to-value ratio resets. This ratio compares how much you owe to the car’s market value. A higher loan-to-value ratio means less equity.

By repeatedly rolling over negative equity, you ensure the loan amount will always exceed the car value. Then equity remains elusive as interest continues accruing on a larger principal. Breaking out of the cycle by paying down the loan faster or building equity another way becomes critical.

 

Higher Risk of Default

Rolling over car loan debt significantly increases the risk of eventually defaulting on payments and having the vehicle repossessed. This is because the larger loan amount requires higher monthly payments, which many borrowers struggle to afford. When the payments become unmanageable, drivers inevitably fall behind.

For those already having difficulty keeping up with the existing loan, tacking on more principal creates a vicious cycle. After a year or two of payments on the new, larger loan, the car will once again be underwater. This prompts another rollover and perpetuates the downward spiral of increasing debt obligations.

Drivers who rolled over negative equity are more than twice as likely to default compared to those who did not, according to research by the Federal Reserve Bank of New York. With repossession rates highest for subprime borrowers, rolling over puts financially vulnerable car owners at even greater risk of losing their vehicle.

 

No Way Out if Totaled

One of the biggest risks of rolling over a car loan into a new vehicle is having no way out if the car gets totaled in an accident. With a rolled over loan, you are almost guaranteed to owe more than the car is worth. This means if the vehicle is totaled, the insurance company will only pay out the current cash value – not what you still owe on the loan.

For example, let’s say you rolled over $5,000 of negative equity into a $20,000 loan for a new car. After a year, the car gets totaled but you still owe $18,000. However, the car’s value has depreciated to $15,000. This means the insurance company will only pay out $15,000, leaving you on the hook for the remaining $3,000 balance.

Gap insurance is supposed to cover the difference between the insurance payout and remaining loan balance. But most gap policies do not cover rolled over loan amounts. You would likely receive nothing for the $5,000 you rolled over, and potentially owe thousands out of pocket.

Without gap coverage, rolling equity into a new car loan leaves you completely exposed in the event of a total loss. It’s critical to read the fine print of any gap policy and understand exactly what is covered before moving forward.

 

Selling Privately

One alternative to rolling over debt into a new car loan is to sell your current vehicle privately instead of trading it in at the dealership. You can often get significantly more money by selling the car yourself rather than accepting the trade-in value offered by the dealer.

Selling privately does require more time and effort on your part. You’ll need to take photos of the vehicle, create listings online and in print, show the car to prospective buyers, and handle negotiations. However, the extra money you can get compared to a trade-in may make it worthwhile.

Research shows that selling privately brings in an average of $1000-$5000 more than trading in, even for older cars with higher mileage. With more cash from a private sale, you can put a greater down payment on your next vehicle and lower the amount financed.

Selling privately prevents rolling as much debt from your old loan into the new one. You may still have some negative equity to finance, but likely much less. This reduces the total interest paid over the life of the loan and risk of being upside down.

While more inconvenient than a quick trade-in, taking the time to sell your current vehicle yourself lets you maximize its value. That makes it easier to purchase another car without piling on more loan debt in the process.

 

Paying Down Current Loan

One alternative to rolling over negative equity is to simply keep paying down your existing auto loan. This allows you to slowly build equity in the vehicle over time until you reach positive equity.

Paying down the loan rather than trading in can take longer before you’re able to get into a new car. But by continuing to make payments, you’re ensuring more of each payment goes towards the principal rather than interest. This makes paying down the loan one of the faster ways to build equity.

The key is to make payments on time and even pay extra towards the principal if possible. Even an extra $50-100 per month can help you reach positive equity faster. Apps like Clutch and services like Trim can help you find room in your budget for those extra principal payments.

Paying down the loan has the added benefit of improving your credit score as you build a strong payment history. A higher score will help qualify you for better rates when you eventually do get a new vehicle.

Trading in won’t make the debt disappear. So focus on paying down the loan to build equity, even if it delays getting into another car by a year or more. The equity and improved credit are worth the wait.

 

Refinancing

Another alternative to rolling over debt into a new car loan is to refinance the existing auto loan. Refinancing involves taking out a new loan to pay off the old one. This allows borrowers to potentially qualify for a lower interest rate based on improved credit or other factors.

Paying less interest through a refinance can help more of the monthly payment go toward the principal balance. This allows the loan to be paid off faster, reaching positive equity sooner. Many lenders even offer no-fee refinancing options so borrowers don’t incur additional costs.

However, qualifying for an auto loan refinance can be challenging for some borrowers. Lenders will evaluate credit scores, income, and other factors just like with a new loan application. Those with very poor credit or significant negative equity may not qualify for attractive refinance terms.

Overall, refinancing should be explored as an alternative before rolling over debt into a new, larger auto loan. Even a slightly lower rate can accelerate the path to positive equity over time. For borrowers with good credit, it’s often the smarter choice.

 

Considering All Options

Before deciding to roll over your car loan, it’s important to carefully weigh all of your alternatives and the pros and cons of each option:

 

  • Selling privately allows you to potentially get more money for your vehicle than a trade-in, but requires more time and effort on your part to find a buyer, negotiate a price, and handle the sale yourself.
  • Paying down your current loan will help you build equity faster, but requires having the extra funds available each month to put toward the principal.
  • Refinancing may lower your interest rate and monthly payments, but you’ll need a strong credit score to qualify and closing costs can negate short-term savings.
  • Rolling over debt seems fast and convenient, but greatly increases total interest paid and the risk of being upside down on the new loan.

 

Given the long-term financial implications, rolling over car loan debt should really be a last resort option after you’ve determined the other alternatives won’t work. Taking the time to fully weigh the pros and cons of each approach can help you make the most informed decision.

 

How to Minimize Rollover Risks

If you find yourself in a situation where rolling over your auto loan seems unavoidable, there are some strategies you can use to minimize the risks and additional costs:

 

Shop Lenders to Get Best Rates

Don’t just accept the first loan offer from the dealership. Shop around with banks, credit unions, and online lenders to find the most competitive interest rates and terms. Even a small rate difference of 1-2% can save thousands in interest costs over the life of the loan.

 

Shorter Terms and Lower Rates

Opt for the shortest loan term you can afford, as this minimizes the total interest paid. A 48 or 60 month term will cost much less than 72 or 84 months. Also, a lower interest rate lessens the amount of interest that gets added to the principal when rolling over a loan.

 

Conclusion

Rolling over car loan debt into a new auto loan may seem like an easy fix, but this common practice comes with major financial risks that often outweigh any perceived benefits. As summarized throughout this article, rolling over negative equity leads to higher total debt, increased interest costs, difficulty building real equity, and a much greater risk of being stuck in an upside down loan or defaulting entirely.

Before choosing to roll debt into a new car loan, carefully consider all alternatives and run the numbers to understand the true long-term costs. Work to pay down your existing loan or sell your trade-in outright instead of accepting dealer financing. And if you do decide to roll over, minimize the risks by limiting the rollover amount, selecting an affordable new vehicle, and negotiating the best possible interest rate.

Rolling over car loans should be an absolute last resort. But by educating yourself on the pitfalls and exploring smarter options, you can avoid going deeper upside down when you need a new vehicle.

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Questions About Rolling Over a Car Loan

When you roll over a car loan in Canada, the remaining balance on your existing auto loan is added to the financing for your next vehicle purchase. This allows you to trade in your current vehicle even if you still owe money on it. The dealer pays off your old loan and folds the remaining balance into your new car loan.



Rolling over a car loan in Canada can seem appealing as it allows you to get a new vehicle, but it has downsides. You end up paying interest on your old loan balance at the rate of your new loan, which is often higher. It also leaves you with a larger auto loan amount to pay off. Consider paying off more of your current loan first.

When you trade in your current vehicle in Canada with an outstanding loan balance, the dealer will pay off your existing auto loan using the trade-in value. If your loan balance exceeds the trade-in value, the remaining amount gets rolled over into the financing for your next vehicle. You continue paying off that balance.

Negative equity refers to when you owe more on your car loan than your vehicle is currently worth. It happens when the trade-in value or resale value drops below the remaining loan balance. The difference gets rolled into your next auto loan as part of a trade-in. This increases your debt.

Most Canadian lenders allow rolling over 100-125% of the new car purchase price in negative equity. However, the total vehicle loan amount usually cannot exceed 140% of the car’s value in Canada. Going beyond this ceiling further increases the risk of becoming seriously upside down on the new loan.

It’s generally not recommended to roll over negative equity in Canada unless absolutely necessary. Try to pay down your loan first to minimize negative equity. If you must roll it over, aim for the shortest loan term possible on your next vehicle to pay it off quicker. Limit the amount rolled over to less than 100% of the new car price.

Rolling negative equity into your next auto loan in Canada significantly increases your debt burden and out-of-pocket costs over the long run. It leaves you at greater risk of becoming seriously underwater on the new loan as soon as you drive the next car off the lot. This makes it very difficult to get out of the cycle of rolled-over negative equity.

Rolling over a car loan into your new auto financing should not directly hurt your credit score in Canada. As long as payments are made on time, it has little impact. However, the larger loan amount will negatively affect your debt-to-income ratio, which lenders consider when reviewing credit applications.

Most Canadian lenders will approve a car loan with negative equity, allowing you to roll over 100-125% of the vehicle purchase price typically. However, the loan amount cannot exceed 140% of the car’s value in most cases. Shop around for the best rates to save on interest charges.

When rolling over a car loan in Canada, you’ll need your existing registration and ownership documents, current driver’s license, proof of insurance on your current vehicle, proof of income such as recent pay stubs, and an itemized list of any extras being financed into the new loan.

To avoid rolling over auto loans in Canada, pay off as much as possible on your current vehicle loan to minimize negative equity before trading in. Lease returns should be inspected early for excess wear and tear fees. Selling privately rather than trading in can yield more cash to put toward your next purchase.

Common fees charged when rolling over a car loan in Canada include origination fees on the new loan, registration costs for the new vehicle, sales taxes, lien registration fees if financing, and borrowing costs. Ask for a detailed breakdown of all fees from your lender.

Yes, with most leases in Canada you have the option to roll over your lease-end balance into a finance agreement to purchase your leased vehicle rather than returning it. This converts your lease payments into a traditional car loan for the remaining value. Extra fees may apply.



The best way to avoid negative equity is to make larger or extra payments on your current vehicle loan to get ahead prior to trading in your car. Boosting your down payment on the new purchase also minimizes loan rollover. Choosing a shorter loan term further reduces interest costs over time.

If you are declined when trying to roll over negative equity into a new car loan in Canada, you have a few options. Pay down your loan to qualify for rollover financing, sell your vehicle privately to pay off the loan, or keep driving your current paid-off vehicle until you have positive equity to trade it in.

Putting extra money down on your next auto purchase when rolling over negative equity in Canada will lower the amount financed. This helps by reducing the loan principal, interest charges, and risk of being severely underwater on the new loan. Aim to put down over 20 percent if possible.

The best rates for rolling over negative equity on a car loan in Canada are typically available from credit unions, which often offer prime minus rates. Banks sometimes match credit union vehicle financing rates. Getting pre-approved locks in the rate while you shop for the right car deal.



To avoid rolling over auto debt indefinitely in Canada, pay off as much negative equity as possible on your trade-in first. Then get the shortest loan term possible, choose a affordable new vehicle, and make extra principal payments to pay off your loan early. Sticking to a budget also prevents perpetual loan rollovers.

Trading in your car in Canada before paying off your loan means the loan balance gets settled first using your trade-in value, and any leftover amount gets rolled into a new car loan. This negative equity increases debt and interest costs. It’s best to pay down more of your existing loan first.

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