Should You Let the Dealer Pay Off Your Old Car Loan?

by Miranda Marquit · 5 comments

Car salesman

One of the many gimmicks car dealers use is the promise of paying off your old car loan. If you trade in your car, the dealer agrees to pay off the loan on the vehicle. You end up with a new car, and you don’t have to worry about making payments on both the old and the new loan.

This may seem like a good deal at first, but there are some things that you need to be aware of:

You Might Still Have to Pay the Loan

Yes, the dealer might make payments to your old lender and discharge the loan. However, it’s important to realize that, in many cases, the amount of the old loan is added to your new loan. Even though the lender pays off the old loan, you’re still responsible for paying them what you owe. It’s more like a balance transfer than actually having the loan paid off on your behalf, so don’t be fooled. Pay attention to the terms of the agreement, and be careful what you sign up for.

Make Sure You Get Credit for the Trade-In

Sometimes, in the shuffle of the paperwork, you might not get the value for your trade-in that you deserve. The dealer might just use the trade-in to help you offset the cost of the new purchase you’re making, telling you what a wonderful price you’re getting on the new vehicle by reducing its cost. But you’ll still have to account for the transfer of your old loan on top of your new loan. Understand what value you’re getting for your trade-in, and pay attention to how it’ll be credited to you. Make sure that the transaction is completed in the way that best benefits you.

David’s Note: It’s easy to overpay when transactions become complicated. That’s why it’s always better to negotiate a trade-in value for your vehicle without combining the purchase price of the new vehicle. Run away anytime the salesman tries to tell you it’s easier for both parties if you lump the two deals together. They know it’s easier to get more money out of you by doing so. Get a value for your trade-in, then negotiate again on the new car purchase.

Consider Paying Off the Loan on Your Own

There are some exceptional dealerships that will accept your trade-in and truly pay off your old loan balance. But, in general, you’re probably better off just paying off the old loan on your own before you decide to get a new car. Seldom will you be in a better position by asking the dealer to roll over your old loan, as most dealers are charging you a fee for this convenience.

Instead of adding to your debt load, keep driving your car until it’s paid off.  If the amount you can get covers the balance on your loan, another option is to sell your old car. This way, at least you’re getting a new car without existing car debt!

Have you ever traded in your car even though you still owe money on it? Do you regret the decision, or would you do it again?

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{ 5 comments… read them below or add one }

Stephanie November 13, 2012 at 5:49 am

We fell for this on our last car purchase. WORST. DECISION . EVER!! Don’t do it! Just live with your car till you pay it off yourself.


Ben November 13, 2012 at 6:17 am

This is an interesting article. I recently went through this, and honestly believe I came out better.

Almost two years ago I bought a Tacoma, V6, offroad package – pretty much the works. It was a nice truck. I drove it off the lot with a $22,xxx loan. It came down to roughly $380/mo for 5 years (ouch!). This last September, between gas, and realizing that I did not want 3+ more years of car payments, I opted to ditch the truck for a sedan that would get better gas mileage and (ideally) have no payments. I still owed about $13,xxx on the truck. I picked out the car I wanted (ended up with an 09 Altima) that was priced at about $15k. Did the test drive, liked it, then the fun part – salesmen. After spending some 4 hours in the dealership going back and forth with the sales manager, we came to an agreement. I traded in the truck (and its loan) + about $2500 and walked away with a 4 year old car with 52k miles on it. This car will last me at least 10 years. My decision came down to freeing up cash flow and taking advantage of high trade in value on my truck. Do I doubt the dealer made money on me? No, I bet he did – but I think I came out pretty well, and I am free of a $380 car payment and Im saving around $100/mo in gas (1500miles per month, the truck got 20mpg on a good day, the altima gets 30mpg without trying).

So in short – in the near term, my net worth probably decreased a bit…. but in the long term, the lower operating costs of the new car more than justified my decision.


Kevin @ Credit Bureau Insider November 13, 2012 at 8:54 am

Many dealers (and buyers) prefer to fold the old loan into a new one for one simple reason: people often owe more on the loan than the car is worth in trade.

Most car owners are underwater on their car loan the moment they drive it out of the showroom. People borrow against the retail value, and get the wholesale value when trading in.

By rolling the old loan into the new, both the dealer and buyer don’t have to face this reality. The dealer doesn’t want people to know the true costs, and many buyers just want a shiny new car and prefer not to face reality.


MoneyNing November 13, 2012 at 2:20 pm

The point about facing reality is an interesting one. So many people don’t even want to know how much they are losing out on every day decisions. If people are just honest with themselves, they can likely reduce their spending.


Bert November 15, 2012 at 1:28 pm

Kevin is absolutely correct in stating a new car buyer is underwater immediately upon leaving the lot. Your dream auto’s value decreases at least 33% at this juncture. Mixing a trade in, with or without an existing loan, only obscures the overall value of the deal. The only way to be perfectly sure you are receiving the best buy at a dealership, is to go straight for the vehicle, by itself. If you are unable to pay cash, then pre-arrange a loan with your bank, or even better, with your credit union. Know in advance how much you will be able to spend. If you still owe on your present clunker, go to the lender for a payout amount. My own credit union offers their repos for sale periodically. They will add an unwanted unit any member has to their list, upon request, and only keep the balance of the loan for themselves. This efficiently puts motivated buyers and sellers together. Although Ben is happy with his deal, he would have fared far better going a similar route.


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