[Article Image by Alpha Stock Images – http://alphastockimages.com/ / Original Author: Nick Youngson – http://www.nyphotographic.com/]
Want to roll over a loan? You won’t have to look far. As debt.org correctly puts it, finance companies and dealerships are posting ads every single day to convince you to do just that.
The proposition is certainly alluring: Imagine not having to worry about unpaid debt from your previous car. Just roll the loan over to the next and drive off the lot with a brand new model.
Unfortunately, as all experts agree, rolling over a loan is a very bad idea. And while refinancing is far better, it may be hard to get.
In this special, we’ll take a closer look at the topic and help you decide what to do when you are having trouble paying for your next vehicle.
When does rolling over a loan enter the picture?
That’s the big question isn’t it: Why roll over a loan in the first place?
Here’s the typical scenario: Say you want to replace your old car. You already have a new model in mind, but there’s one problem: You haven’t yet paid back the loan on the old one.
In itself, this need not be a problem. After all, you could theoretically sell the car, pay off the remaining loan and still make a profit. You can then use that profit as a down payment for the next one.
Unfortunately, that’s not how things work most of the time.
Being upside down
The problem is that most people won’t make a profit when selling off their old car. This is because the vehicle is usually worth less than what you still owe the dealership or the bank. Experts refer to this as negative equity. In simpler terms, it is sometimes also called “being upside down” on the loan.
Being upside down on a loan is a serious issue, because it makes it even harder to find car finance.
Let’s say you want to buy a £10,000 car and you can only make a £1,000 down payment. You still need to pay back £5,000 on your old loan, but your car’s only worth £2,000.
What this means is the following: If you sell your old car, you’ll make a £2,000 loss. Suddenly, you can no longer make the down payment. You may in fact no longer be able to afford the car at all.
Why rolling over the loan looks alluring
In a predicament like this, many dealers will offer you to roll over the loan. They will pay off your previous commitment for you and then add the outstanding sum to your next loan.
Let’s return to the example we just gave you. The dealer will pay for the remaining £2,000 and add them to the balance of your loan with him. That loan used to be £9,000, so if we add the £2,000 to that, you now have a loan of £11,000.
Initially, this doesn’t look too bad. Although your monthly contributions will certainly rise, the difference may not be excessive. You’re the proud owner of a new car and all is well.
Or is it?
In reality, you have just created a very bad situation for yourself. Just a few paragraphs earlier, we explained the problems of being upside down on a loan to you. The main issue is that being upside down means that you create negative equity for yourself, which reduces your financial capacity to get a loan and finance new purchases.
With every new car, you’re already by default upside down on your loan. This is because factory new cars depreciate very rapidly over the first few months. After a year, they can be worth 20-30% less than they were when you bought them. At the same time, you haven’t paid off a lot of money yet.
By rolling over a loan, you are making this problem worse. After all, your car is depreciating as quickly as ever. But now you have £2,000 more to pay off.
Things get worse …
To add insult to injury, a higher loan usually means a higher rate. So not only do you need to pay back more and not only are you upside down on your loan for longer than before. You also need to pay back more than you had to in the earlier example.
The dealer may then purport to help you by extending the length of the loan. This is generally a good idea, because it helps with keeping the payments low. It is something we also offer our buyers and which they really appreciate.
If you’re rolling over your loan into a new car purchase, however, it exacerbates your financial woes, because it means you’re upside down for even longer. Imagine having to pay off your car loan for eight years or even more!
Rolling over: It’s the new norm
As you can see, rolling over a loan creates a lot of serious problems.
And yet, it is fast becoming the new norm in the car industry. According to debt.org:
“The fact is that increasing numbers of people have car loans that leave them upside-down. In the first quarter of 2017, a record 33% of new car sales were made to people with negative equity who owed an average $5,147 on their loans. The same thing happens at used car lots. Edmunds, an online resource for automotive information, said a record 26% of trade-ins had negative equity averaging $3,854.”
This situation all but forces car buyers into rolling over their loans.
The main culprit, the way debt.org sees it, are too low down payments. If you want to avoid being upside down on a new car loan, you will have to put down at least 20% of the purchasing price as a down payment. Statistics are indicating that hardly anyone is actually doing this.
So what to do about this? Here are a few recommendations from our finance experts at CCC about how to improve on the issues of rolling over a loan:
Buying used helps
Rolling over a loan into a new car deal is especially problematic, since it compounds the issue of being upside down. Used cars don’t typically have this problem. Since they tend to cost a lot less (thanks to depreciation) and since they no longer depreciate a lot (since depreciation eventually tapers off), you may sometimes not even need a down payment to be on top of things.
This is why opting for a second hand model is the best way of improving on the problems of rolling over a loan. It is still not the best thing in the world. But at least it’s not the worst either.
Buying a cheaper model helps
This is a no brainer, really. The cheaper the car you’re buying, the less money you have to borrow, the less you need to roll over into a new loan.
Fortunately, these days the second hand car market has become so big that finding interesting cheaper alternatives is almost always an option. You can choose not only from a wide range of different models, but also from many generations of the same model. This means that by being patient and waiting for the right car to come around, you can save a lot of problems arising from rolling over the loan.
Unfortunately, inadequate research is quoted by experts as one of the biggest problems when it comes to car finance. With the research options offered by the Internet, this is really inexcusable.
Increasing the down payment helps
It may not always be possible. But if you can, you should definitely try to increase the down payment in your loan.
In fact, too low down payments, as we pointed out earlier, are at the heart of many car finance issues. If your down payment isn’t big enough, you risk being upside down on your loan from the get go. Needless to say, it’s going to be very hard to get back into the black again from there.
Increasing the down payment is not as impossible as it may seem. If you have some savings, it may be wise to put them to good use. You can also simply wait just a little longer before moving on to a new car and put some money on the side in the meantime. Even if you can only afford to save £200 each month, you’ll have almost £2,500 after one year.
Buy a more economical car
There is one exception to the rule that rolling over a loan is always a sign that something’s wrong. This is when your old car is a real gas-guzzler, racking up repair bills and just generally requiring a lot of attention and maintenance.
In a situation like this, moving on to a different vehicle, even if it requires you to roll over the loan, can actually be beneficial.
To see if this is actually the case, you will really need to crunch some numbers. This is because savings in petrol costs take time to make themselves felt. And even larger repair bills only rarely justify getting yourself a new car.
It is, however, possible that it really does make sense. If you suspect this may be the case, get that calculator out right now.
Keeping the car for a long time
Rolling over a loan is always going to be tough. And it’s rarely a good idea. However, it may sometimes be necessary. This is especially true if you need the car for work.
If this is the case, then you may have to bite the bullet and buy a car on a larger loan. There is, however, something you can do to improve on your situation: Keep this new car for a very long time. If you keep the car long enough, you will eventually be able to pay it off completely and return to the black. After all, if you stick to the plan and continue to diligently pay your dues you won’t be upside down on the loan for always,.
Do note, however, that this all but locks you into your current deal for many years. Sometimes, 8-10 years are required for you to finally become debt-free again. That’s a long time, especially if you appreciate the freedom to switch cars from time to time.
Rolling over into a lease
There’s an intriguing alternative to rolling over a loan into a new car. This is when you roll over a loan into a lease. Essentially, the concept is identical. The difference is that the rollover amount is not added to a loan payment, but to the calculations for your monthly lease.
These are the ideas behind this approach:
- A lease involves lower monthly payments. So you can keep your rates down, reduce financial strain and reduce the risk of defaulting on your debt.
- After the lease term ends, there is neither obligation nor opportunity to purchase the vehicle you leased. You are simply released from your contract or you can decide to extend it. Either way, you are now debt-free.
Rolling over a loan into a lease is a great way to become debt free again and avoid being upside down on a loan for very long periods of time. However, be aware that leasing a car is the most expensive option of all. Also, you’re never the actual owner of your car.
As a last resort, however, this is anything but a bad choice.
Refinancing instead of rolling over
Car experts will often tell you that refinancing a loan is a much better option than rolling it over.
So how does this work?
When you want to buy a new car but you’re upside down on the loan, you can try to take up a loan to cover for your loss and get in a reasonable down payment. If interest rates are attractive, this can be an excellent way to avoid being upside down and creating some positive equity for yourself.
The main problem with refinancing a car is that it is very hard to convince a bank to do this for you. The incentive for them is not very high and the risk of you defaulting is still pretty bad.
Everything depends on the concrete numbers and potentially also on your relationship with your bank manager. If you believe you stand a chance, you should do everything your power to make it work.
Cars at CCC
That said, you should avoid rolling over a loan at all cost. Maybe we can help you with that. CCC specialises in used car finance for those with bad credit. Our approach is that each customer is different and that we need to find customised solutions for everyone.
This is why we’ll go through all available options with you and look for the one that’s ideal. In our Manchester showroom, you can select from a wide range of available cars, all in great condition and all at fantastic prices.
Get in touch with us now. Write us an email, give us a call or drop by our showroom in Manchester. We look forward to getting you behind the wheel again!