Refinancing...When? How?

[crazydebt]

Hello everyone. I was wondering when is a good time to refinaince my car loan. I got the loan last year around March 06 and am paying 10.95 percent on it I think or was it 11.95. Anyways, its going to be about 10 months now and have never missed a payment. Is it a good idea to refinance to a lower rate? I am using Capital One auto. Should I go through them again and see what kind of offer I can get or go with another company?. let me know. Thanks.

[HHM]

You need to carefully run the numbers on car refinancing. In the long run, (meaning the life of the car loan), you almost ALWAYS lose money in a car refi, regardless of how much you can lower your interest rate. There really is no way to lower your payment in a car refi and not end up paying more money over the long run.

The only way to come out even or ahead, is this...

For example, lets say your original loan is for 60 months, and you have been paying for 2 years. The only way to not lose money is to do a Refi for THREE years and reduce your interest rate by about 3 points, however, odds are, your monthly payment would actually be higher. But over the life of the loan, you lay out less money.

[ODDBALL]

I was just approved through Capital One's Blank Check Program, with not so good rates (have not accepted the offer just yet). What I found out is Capital One does not refinance their own loans. You may be able to refi with your bank/credit union. With the rate that I received, if I accept the offer, I know I will refi within 6 months to a year, but at the same time, going for a shorter term. Another thing that I hear is good is to allow yourself to pay additional money with each payment. Good Luck!!!

[crazydebt]

just curious, what rate did you get?

[HHM]

Let's run an example...

A proper way to refinance
Total Amount Financed
$15,000, 60 months, 11.95%, monthly payment $333.29
If you paid this loan to the end, you would have paid 4,997.27 in interest
TOTAL COST OF CAR, $19,997.27
Refinance after 1 year.
Balance on note at 1 year, $12,873.16
Total interest paid to date, 1,538.32

Refi terms
12,873.16, 48 months, 8.95% (being generous), monthly payment 320.04
Total interest paid over life of the loan $2,488.93
Total combined interest paid on this car, 4,028.25
TOTAL COST OF REFI'D Car, $19,028.25
Total Savings if you refi'd: $969.02, or, $242.26 per year for the 4 years of the refi term

This example does not take into account possible fees charged by the new lender (i.e. title, etc), and earlier payment penalties (which are common on sub-prime car loans).

The problem is, most people do not refi like that.
As a rule of thumb, in a refi, you do not want to go beyond the term of your existing car loan (the catch on that is, your payment doesn't go down that much). So, if you originally took out a 5 year loan, and refi after 1 year, your new loan should have a term of no more than 4 years. Also, you should never refi if you have not been in your existing car loan for at least a year and your interest rate should drop by 3 percentage point. If you can't pull that kind of deal of better, a refi will probably end up costing you more in the long run.

The other issue I haven't touched on, (which makes refi ALWAYS more costly) is the depreciated value. For the most part, the balance you owe on the note that has to get refi'd is usually higher than the market value of the car, this is especially true when refinancing cars you purchased new. Thus, the last factor to consider in a refi is the current market value of your vehicle. If you are upside down, the savings you might get in interest is usually eclipsed by the loss on depreciated value, making a refi a net loss.

So, taking our above example, the amount financed is $15,000, (let's assume you did not put any money down), thus, that amount includes, tax, title, documentation. Let's say all the extra's come to $1,500. Thus, the true cost of the car at time of purchase is $13,500. The subjective question is, how much do you think that car will be worth at the end of 1 year of average driving. Regardless, your refi balance is 12,873.16, so do you think the car will lose $626.84 the course of a year, Probably. The average car will only retain 35% of its value after 5 years. So, assuming the car you purchased was used when you bought it, let's say 3 years old, it will have an average depreciation in excess of 10 percent (probably around 12-15%) a year during the time YOU own. Thus, the car in this example is likely to be worth much less than the refi price and if the value of the vehicle is more than $969 less than the refi balance, you will lose money in the long run.

[ODDBALL]

just curious, what rate did you get?

The rate that I got was 13.95% (OUCH). I'm hoping to find a better rate with someone else. I need a vehicle, as my car of 8 years was totalled on Sunday. The person that I hit ran a stop sign, and he was in a stolen vehicle, and he fled the scene. I am a single parent, and only had the one vehicle. I'm a little pissed about my situation, as I have not had a car payment, and now I will. I have been trying to fix my credit reports since my BK7 in June of 2005, and was going to get thing rolling again soon. Well, not soon enough!!! If this is the best offer I get, I will refi within 6-12 months, as well as pay extra. If it weren't for my car being totalled, I wouldn't even be applying for car loans. It just really sucks!

[crazydebt]

hello everyone again. Well I was just curious so I went through lendingtree and see about refin my car loan. I got pretty good rates. What do you guys think and recommend I do. Here is the situation:

I bought a car in March of 06 and got a loan from Capital One for 20k. Interest is at 11.95 for 60 months. Pay about 445 per month. Current balance on the loan is 16.5k

Going through lendingtree, I got an offer from Roadloan. I got a pretty good offer.
$17,915.00 $338.97 8.29% 66-Months

Anyways, I want to cut cost somehow and make the best decision down the road. Let me know what you think. Thank you.

[BassBoy]

Well, let's see. If you do the math.......

Your current loan would a total in payments of $26700.

With the loan, your total in payments for the new would be $22375, plus the $5340 you've paid over the last year, your total in payments would be $27715.

You're flushing about $1000 down the toilet. You're better off to keep you're current loan. We can understand cutting monthly expenses, but if cutting those expenses costs you more in the long run, it's really not worth it.

Just my thoughts.

[crazydebt]

All this number is so confusing. The 3.5 percent over 4 years will be a pretty good amount of saving but my math is probably off. I'm going to think about it over the weekend. The lenders are already calling. Anyways. anymore feedback.

[BassBoy]

Yes, the 3.5% is a good savings, but you're in a 60 month loan, that you've stated you've paid on since March 06 (you're first payment may have been due in April). Well now, you're talking about going to 66 months..........and additional 18 months. That's where my numbers are coming from. You just turned your loan into a 78 month loan (12 months you've already paid, plus another 66 months). The additional 18 months of payments is where the $1000 loss comes from.

Now, if you refinanced for the reamining 48 months, and you got a 3.5% interest rate drop, then yes, you'd be saving money.

In my opinion, you never want to refinance a car for an additional 5 or 6 years. I think one can refinance the loan, but keep the term no more than the number of months remaining or maybe less.

[crazydebt]

hello again. Oh no, I wasn't going to do the 66 month term. There are a few option that rose up today. I can do a 48 month at 9.5 percent with the same monthly payment of 445. There is another that is 60 month at 8.95 with a 375 per month. What do you think?

[BassBoy]

Hmmm.....another 48 months, and the same payment? What's the advantage?

With the 60 month offer, you'll pay $22500 total in payments. Now add the $5340 you've paid over the last year, and that's a total of $27840 paid. You're still paying more than the $26700 if you stayed with your current loan.

If you're looking to refinance, then I would suggest that if you can get into a 48 month term and the total amount you would end up paying is less than the $26700 (new 48 month loan plus the year of payments you've already made), then yes, a refinance could be possible.