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Thread: Re-financing a vehicle

  1. #1
    Senior Member KenzieJ's Avatar
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    Default Re-financing a vehicle

    I bought a new car about a year and a half ago which I'm making payments on. My credit waa fair, but not nearly as good as it is now. I tried to get refinanced but the bank told me they wanted a 5k down payment and would finance the rest at 3.99 percent.
    I should have done more research before applying, because I didn't think they would ask for a down payment.
    My question is.. What happens if I decide to go for it and later down the road want to trade in my car? I'm pretty sure I'm gonna want a different car in a year or two, so I'm not even sure I should go for this. Is this smart if you plan to trade in within the next year or two? Also, is it routine for them to want a down payment on a re finance? I'm also wondering if I should try a different bank.

    My current apr is at 6.99%

  2. #2
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    Default Re: Re-financing a vehicle

    If you're able to put $5,000 down, you should refinance your car at 3.99 percent interest. It is normal for a bank to ask for money down, so that the car is worth more than what they're lending to you. You should call other banks to see if you can get a lower rate, and/or a lower down payment. If you don't drive a lot of miles and plan to get a new car every 3 years, you should also consider leasing.

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    Senior Member KenzieJ's Avatar
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    Default Re: Re-financing a vehicle

    Quote Originally Posted by eagle2 View Post
    If you're able to put $5,000 down, you should refinance your car at 3.99 percent interest. It is normal for a bank to ask for money down, so that the car is worth more than what they're lending to you. You should call other banks to see if you can get a lower rate, and/or a lower down payment. If you don't drive a lot of miles and plan to get a new car every 3 years, you should also consider leasing.
    Thanks for the reply. I have 30 days until this offer is no longer good so I can think about it for a few days. I love the car I have but I think I got excited and didn't explore my options. I didn't think I'd ever get approved for a loan to begin with and was taken by surprise when they basically handed me my dream car.
    I had just started re building my credit and decided to head to the dealer once I got to an acceptable rate. Had I only waited a few months-a year it would have been a lot higher lol. Thanks for the help.. I will see what I do. Part of me feels bad knowing how much of a money pit new cars are.

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    God/dess rickdugan's Avatar
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    Default Re: Re-financing a vehicle

    Your car is currently underwater, as are most new cars, which is why they need the down payment. They don't want to refinance more than the car is worth.

    I would advise against taking another loan at this point as it may actually cost you more money. Car payment plans front load the interest using an amortization schedule. Without getting too technical, this means that you are paying most of the interest for the entire life of the loan in the first two years. For example, if you took out a 60 month loan, in the last year and a half you've already paid 50% of all the interest for the entire life of the loan. If it was a 48 month loan, you've already paid 60% of all the lifetime interest on the loan.

    If you take out another loan now, you'll be resetting the interest clock on a new front loaded loan. You may also be subject to refinancing fees and prepayment penalties for the existing loan. At this point you're paying mostly principal anyway, so you might as well stay put with the existing loan.

    As far as trading in the car in a year or two, I would wait until the car is worth more than the remaining balance on the loan. That should be the case during your last 18-24 months of payments. The last thing you want is to go even further underwater on the next car and then pay front loaded interest twice on the same re-financed principal.

    All cars are money pits because they are depreciating assets. The goal is to pay as little as possible to drive what you like. A new car can be a good value if you plan on holding onto it for several years and if it is reliable, especially once you pay the car off and can scale down the insurance premiums to liability only. But if you need a new car every few years, then the one thing that I can agree with eagle on is that you'd be better off leasing.

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    Default Re: Re-financing a vehicle

    Probably the best way to figure out if it's worth refinancing, is to add up the total amount you have left to pay on your current loan, and the total amount you would pay if you were to refinance, and also figure out how much interest you would lose from paying down $5,000. Also, if you have $5,000 to put down, and if you decide not to refinance, you may be able to make a $5,000 payment on your current loan, which would reduce the amount of interest you'll have to pay. You'll have to check with the loan provider if they allow early payments.

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    God/dess rickdugan's Avatar
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    Default Re: Re-financing a vehicle

    ^ I agree that it might be a good educational exercise to compare apples to apples. It's fairly simple: Add up everything you would pay for the new loan, including the down payment, all of the monthly payments and then any early penalty (if any) from the current loan holder. Then add up the total of all of your existing remaining payments and compare the two totals.

    I think you'll be shocked. Best case scenario is that you may shave a few hundred bucks off the total over the life of the loan (assuming no pre-pay penalty and low refi costs). Remember again that you've already paid the existing lender a lot of the interest on the existing loan while not reducing the principal by much. This means that almost all of any reduction you see in monthly payments will come from the $5k you pay and any extension in the loan timeframe, not from the interest rate reduction.

    Also understand that credit bureaus often treat auto loan refinancing as a negative event. So even if you manage to net a few hundred bucks over the remaining life of the loan it probably won't be worth the ding that your credit score will absorb.

    Net-net you're just too far into your loan now for a refi to make a lot of sense. In fact, you're in the worst part of the loan to do anything right now for all the reasons discussed above. If you had refinanced in the first few months then you might have saved some real cash, but IMHO at this point you should ride this loan out until you get closer to the end. But by all means you should go through the exercise and confirm if you are uncertain.
    Last edited by rickdugan; 08-15-2019 at 10:35 AM.

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    Default Re: Re-financing a vehicle

    Early payment penalties are allowed in 36 states. For car loans of 60 months or less, the rule of 78s is allowed. This basically front loads the interest into a loan and you save little if anything by pre-paying. Some states do prohibit the rule of 78s and prepayment penalties. If you are in one of the states that prohibit early payment penalties, then increase what you are paying now, and mark the extra as principal payment. The car will pay off faster, you will pay less interest and you'll be above water sooner. The cost is nothing beyond the extra payment. If you have $5,000 for the down payment, and your loan allows early repayment, then think about paying the $5,000 on the existing loan.

    The key is to look at the amortization table on your car loan. If it is a rule of 78s loan, you are likely out of luck. You can ask the lender to reamortize, but they are under no obligation to do so.

    HTH
    Z

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    Default Re: Re-financing a vehicle

    I was in the same situation. I have perfect credit and I had purchased a new Ford with a 4 year Chase auto loan thru the dealer for $630/month. A year later, Chase had a deal that if I opened a checking account they would finance my car at 0.5% compared to my 3.99% loan. So I went in and they would not finance at the new interest rate because the car was worth less than the current loan balance. AND THE LOAN WAS ALREADY WITH CHASE. So I went to the Ford dealer and leased a new Ford and rolled the $2000 negative equity into my 36 month Ford lease. I put nothing down. My new $400 payment was still cheaper with the 3 year lease payment and the negative equity than it was before. My internal interest rate for the lease was 0.5%.

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    God/dess Zofia's Avatar
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    Default Re: Re-financing a vehicle

    When I was in college and dancing, I needed a car. I saved up and bought a beater for a couple of thousand dollars. (Helps my dad is a mechanic.) I drove that car all through college and dancing. When I graduated, I had enough money when combined with my beater to afford a much newer, though still used car. I bought that, and kept saving my money. After a while, I could afford a nearly new used car, so I bought that. I still save my car payment every month and now, I can afford to pay cash for a new car every three or four years, if I want to trade that often. The point is, buy what you can afford to pay cash for. Cars depreciate and unless you are driving for Uber or Lyft, they never make you any money.

    I am to the point now where I only borrow money under two circumstances. First, if what I am borrowing to buy will make me money, even if the thing itself depreciates. Second, if the thing appreciates in value, but, it's not making me money then the interest rate has to be exceptionally low. For example, my house is slowly appreciating and the interest rate on mortgage money is agreeably low, so I am not opposed to having a mortgage. Otherwise, I have borrowed money for things my business needs. Those things make me money, and I'm still very cautious about the interest rate, and the real life depreciation schedule.

    HTH
    Z

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