Hi guys! In February 2011, I financed an 08 Honda Accord at an atrocious 20% interest rate with Wells Fargo (first mistake). At the time I think my FICO score from this site was around a 564 or so.
Fast forward 14 months, I am on my way to being more financially saavy. As part of that, I realized that after 14 payments of $500 per month, I've only managed to bring my principle down on the car about $3000....INSANE! I recently opened up a savings account and IRA with a local credit union, so decided to try my luck at refinancing. Of course they told me I owe about $3000-$3500 more than the car is worth, so they would not refinance. They told me that if I could, however, finance a vehicle straight out through them, as long as it was being sold very close to it's value.
Therein lies the problem - with $3500 of negative equity that I would have to roll, I would be right back in the same situation. Unfortunately, I don't want to take that much money out of my savings to put down a huge downpayment. In speaking with the Honda salesman, he tried a few different scenarios. While he could get me out of the high interest, it didn't make sense in going with a much cheaper vehicle and tacking on the negative equity - that would put me back at square one of driving away already upside down.
His suggestion was a lease on a new vehicle. 2012 Accord - rolling in the negative equity, and being able to walk away free and clear in 36 months. While I was always under the impression that lease payments were significantly lower, these payments on a fully loaded, EX-L model would actually go up about $60 per month.
Here's my question - is is worth the extra $60 per month to lease, be done with the negative equity and have the opportunity to walk away (or in my case, I will probably buy the vehicle at the end of the term for the $15K residual value quoted,because i LOOOOOOOVE Accords) in 36 months, when I actually still have 42 months left on the exisiting 20% interest loan, for a car that's 4 years older?
I would ask the salesperson to run the numbers on the same lease EXCLUDING the negative equity. That's the only way to know what interest rate you are going to be paying. Don't look at this from a "monthly payment" perspective, you need to understand what they are charging you.
As a side note, financing $3,500 for 36 months @3% would be a monthly payment ~$100.
IMO, trading to get out of an upside vehicle into a lease is a bad idea. You are jumping from the pan into the fire and not solving your problem at all.
Why don't you try putting the extra $60/mth you are going to pay for a lease toward the principal balance of the vehicle you have now? Check a loan amortization calculator and see how much that will save you in terms of total interest and how much time it will take off your loan. At least then you actually have an asset after you make your payments. If you switch to the lease you only have a debt and no asset - because you don't own it at anytime during the contract period.
The other option you can do is look around your house and gather up all the "junk" we all collect and sell it on Craigslist or a garage sale. Take that money and dump it against the principal of your existing vehicle. It's fairly easy to put together several thousand dollars over a relatively short period of time that way - then refi with your bank or cu into the smaller payment.
If you do the above, it will do many things for you: 1) you won't be upside down and 2) the payment will be smaller/more affordable and 3) the next time you buy a vehicle you will have an actual asset with some value to put toward the purchase to minimize that "upside down" period. It also keeps you from continuing the cycle of buying with a too high interest rate and making smarter purchases (because you remember the pain of being upside down...lol)!
There is nothing like owning a vehicle without payments. If you lease, you never own the vehicle and you always have a payment. JMO.
My thoughts are no, its not worth it. The problem with your analysis that after 36 months you owe nothing is that right now, at the end of the loan, you will own the car... then you will not. That is a huge difference. Yes, your interest rate is attrocious, but your best solution is to refi, and put the cash down necessary to get the car back to even. You chose an auto loan that would inherently put you upside down, and are now feeling the effects of it. It seems you have the cash to correct it, and you should.
Refi the car, paying cash for the amount you are upside down, and that will lower your payments significantly. Leasing is exactly what the dealership wants because they will not only get a car, get financing on that car, and get financing on the money you are upside down. On top of this... you would be making higher payments than you currently are and making $0 principal payments, as the car isn't yours.
Don't do it.
I agree with just about everything posted above. What a great forum!
The root of the issue is that you're upside down on the car. I would seriously consider using all extra income towards extra payments. Even using savings is not a bad idea, if you have an appetite for a bit of risk. ($1000 in savings is eaning what,$5/yr maybe? Paying that toward the car note would save you ~$200 in the same year!)
Then, as soon as you can re-fi, jump all over it.
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