topic Re: Refinancing: Bad Idea? in Auto Loans

Refinancing: Bad Idea?

Anonymous — Fri, 01 May 2009 21:40:58 GMT

So I just closed on a house and will begin making mortgage payments in June.

My car is one year old, purchased new last year, and has about $17,000 left on the loan at around 7% interest. My credit union has offered to refinance my auto loan--lower interest rate which will cut my monthly payment from 360 a month to about 290.

I'm not sure what to do--on the one hand, basically, the loan will "reset" and I'll be paying five more years; on the other hand, I've never had a mortgage payment before and having lower car payments (and thus more cash) appeals to me.

Any thoughts or suggestions?

Re: Refinancing: Bad Idea?

Anonymous — Fri, 01 May 2009 22:06:56 GMT

I must be missing something..... Refi would result in a reset of the loan to 5 years (60 months). You owe approximately $17K on the loan now. If payment drops to $290 a month for 60 months your total of payments would be $17,400. If your CU is willing to give you an almost 0% APR on a refinance, then it is a no brainer to go through with the refi.

Re: Refinancing: Bad Idea?

Anonymous — Fri, 01 May 2009 22:18:17 GMT

Ooops--sorry--car loan would be for six years, not five--still a good idea?

Re: Refinancing: Bad Idea?

Anonymous — Fri, 01 May 2009 22:21:22 GMT

Your original loan was for 5 or 6 years? I am no accountant or anything, I am just plugging numbers into some of the calculators to look at the total interest paid in each scenario. If the difference is X dollars over the course of the 2 loans, only YOU can determine if that extra amount of money is worth the reduced payment and extended timeline.

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 12:07:27 GMT

Yes, it is a good idea to refi for the lower interest rate. You might look at 60 months, sometimes you get a better rate. So, if the 72 month rate is lower, 60 months might do even better.

HOWEVER, I suggest that after you refi, continue to make your $360 per month payments on the auto. In other words, since you can afford current payment amounts, use the refi lower rate to pay extra principle so that you get out of debt sooner. Then the "reset" as you call it is not a factor.

Lastly, the lower rate also gives you the benefit of being able to make the lower payment "on occassion" if you have a cash flow tight month. However, I HIGHLY suggest that you use the opportunity to pay the auto faster by continuing to pay the $360 rather than only paying the required minimum 290. That will put an extra $840 per year on the loan.

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 12:18:27 GMT

You know, your advice makes great sense--I think it's the initial part of owning a home and getting things I must have (for example, since I've rented all my adult life so far, I've never actually had to mow the lawn, so I need a lawnmower) that concerns me...

At the same time, though, as you say, I want the car payment paid off as quickly as possible. The refinance on the car would give me more leeway; pay the 360 mostly, pay the 290 when cash flow is a little tighter--I do not want to have to put regular household expenses on credit cards!

Thanks for your great advice!

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 15:22:51 GMT

Don't forget to budget savings and emergency funds. Do not make the mistake of living check to check. If you don't have savings or emergency funds (or too little) then divert the extra cash for now to savings and then get busy and have a garage sale, ebay and craigslist sale to raise more cash with the "stuff" that you don't need, don't want, don't use, can live without or is luxury that really isn't necessary.

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 17:01:23 GMT

PS: since you are now a home owner, do not be afraid to shop your homeowners and auto policy around. You may get a combined product discount from an agencey

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 19:27:52 GMT

My auto insurance is with State Farm, so I went to them first for homeowner's insurance--they gave me a good policy on the house and a big discount on my auto insurance, so I went with them. (State Farm has always been good to me because I've been driving 25 years with no accidents or tickets--no claims filed, ever. They like me, I guess, because I give them money and never ask for any back!)

Re: Refinancing: Bad Idea?

Anonymous — Sat, 02 May 2009 19:34:47 GMT

You're a regular insurance company dream

Re: Refinancing: Bad Idea?

Anonymous — Sun, 03 May 2009 19:38:16 GMT

What is the interest rate from your CU ?????

Do the math before you make a decision.

Having a greater cash flow is great, but, you should consider what the over all costs would be.

Extending the contract may not be the best financial decision.

Re: Refinancing: Bad Idea?

Anonymous — Sun, 03 May 2009 21:14:42 GMT

@Anonymous wrote:
What is the interest rate from your CU ?????

Do the math before you make a decision.

Having a greater cash flow is great, but, you should consider what the over all costs would be.

Extending the contract may not be the best financial decision.

Extending the term for a lower rate does not control how long it takes to pay off the loan. As previously posted, the strategy was to continue paying the same dollar amount which means greater principle reduction and having the option of making an occassional lower payment if an unexpected expense came up.

Lower interest rate accrues less interest charges against the same balance. Having the flexibility to make the personal decision on how to best use the savings is always a great financial option, whether used to reduce debt or pay other expenses with the money previously being thrown away to the bank.

Message Edited by txjohn on 05-03-2009 02:14 PM

Re: Refinancing: Bad Idea?

Anonymous — Mon, 04 May 2009 12:10:44 GMT

Without knowing the amount and number of months on the current auto loan, and without knowing the interest rate on the proposed refinance of this loan, it is premature to state one way or another, if it would be a good idea.

There are several "KEY" factors that have been omitted to make a sound financial decision.

I again would highly suggest obtaining the Interest rate and the number of months for the refinance contract and complete a full mathematical work up prior to making a decision.

Re: Refinancing: Bad Idea?

Anonymous — Mon, 04 May 2009 14:09:29 GMT

Maybe I missed something. I understood the OP to state:

1. Currently has a $17k loan at 7% APR and $360 payment.

2. Has been preapproved for a "Lower APR" loan and reduced payment.

3. If item #2 is correct, then by continuing to pay the current dollar amount against the new loan, OP will pay the loan off faster by applying greater amounts to principle.

4. Even if the CU was financing at the same APR but allowing for a longer term, the OP can continue to pay the same amount as current, yet retain the option of paying the lower payment "occassionally" if an unexpected expense arose or a tight month surfaced, similar to the option of making a minimum payment on a CC.

So, by my math, unless the new loan APR is "higher" than the current loan, it provides better options, flexibility and reduced interest charges if the new APR is lower.

Obviously the OP needs to confirm all facts and figures from the CU and make sure they are getting an equal or preferably lower APR, but short of that, I think that the loan presents many potential benefits based upon the OP statements.

In addition, the OP also stated that now being in a mortgage, they were concerned with cash flow options. A new loan does provide more options, though as I suggested, I continue to encourage no reduced amount be paid to the loan but use any savings toward faster debt reduction, while retaining the flexibility and options of lower payment for cash flow management.

@Anonymous wrote:
Without knowing the amount and number of months on the current auto loan, and without knowing the interest rate on the proposed refinance of this loan, it is premature to state one way or another, if it would be a good idea.

There are several "KEY" factors that have been omitted to make a sound financial decision.

I again would highly suggest obtaining the Interest rate and the number of months for the refinance contract and complete a full mathematical work up prior to making a decision.

Re: Refinancing: Bad Idea?

Anonymous — Mon, 04 May 2009 17:56:32 GMT

Nothing personal.

I just disagree with your advise to the OP "Yes, its' a good idea to refi for a lower interest rate" without knowing all the facts and figures.

I stand by my previous suggestion that OP needs to do the math prior to following your advise.

Just a second opinion.

I trust I have not offended you.

Re: Refinancing: Bad Idea?

Anonymous — Mon, 04 May 2009 23:24:04 GMT

Nope, I'm not offended in the least. I was just curious what "KEY" factors had been left out, in your opinion, to prevent a preliminary opinion of the basic validity of the loan?

We know the new loan amount: $17k, new loan term: 60 month, new loan payment: $290 and the new loan APR range: less than 7%.

So, I felt there was adequate information presented to provide an opinion as I stated.

Under what circumstances, or in any possible scenario, is a lower APR not a good financial decision? Can you give an example how refinancing an existing loan into a lower interest rate is a bad financial decision, I can't come up with one, with the only exception being the extension of time in debt if only making the minimum payment.

Anyway, opinions are welcome, that's what this forum is for. And just as you stand by yours, I continue to stand by mine. Lower interest, faster debt reduction and financial flexibility are good financial decisions, IMO

@Anonymous wrote:
Nothing personal.

I just disagree with your advise to the OP "Yes, its' a good idea to refi for a lower interest rate" without knowing all the facts and figures.

I stand by my previous suggestion that OP needs to do the math prior to following your advise.

Just a second opinion.

I trust I have not offended you.

Message Edited by txjohn on 05-04-2009 04:24 PM