Thinking of Refinancing My Car Loan
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  1. #1
    Join Date
    Jan 2016
    Location
    Makati City, Philippines
    Posts
    11

    Default Thinking of Refinancing My Car Loan

    I am aware that refinancing is not an option for everyone but when is it a bad idea to refinance? My friend said that I should first understand my motivations for refinancing and the outcomes that I'm seeking, well all I want is to reduce my monthly car payments that's it. So is it good or bad to refinance?

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  3. #2
    Join Date
    Feb 2017
    Location
    Byron, Il, USA
    Posts
    274

    Default Re: Thinking of Refinancing My Car Loan

    Refinancing means you are changing the original loan to a longer term one. That means you will end up paying MORE for the car than you would at your current loan. So your question should be:

    Why am I unhappy to pay the current loan amount? Is it too much car for your income? Did you lose a great job and now make less?

    If you have too much car, too new, too luxurious or whatever, your odds of keeping the car are poor, unless you are willing to sacrifice other things you want to buy.
    Just my opinion, knowing nothing of your situation, but consider selling that car and buying something a few years older, smaller, less expensive. Having excess payments always weighing on you is a good way to get depressed.

  4. #3
    Join Date
    Sep 2005
    Location
    Greensboro, North Carolina
    Posts
    3,406

    Default Re: Thinking of Refinancing My Car Loan

    The two rationales for refinancing a car (like refinancing a home) are 1) to save money today, or 2) to save money over the long term.

    1) To save money today.
    People that refinance for this reason do so to reduce their monthly payment. That's it. Maybe you aren't cash flow positive, or think you're paying too much, or you want to use the money for something else. Whatever the reason, you get a lower payment by either A) getting a lower interest rate (which isn't common with car loans, as interest rates typically don't change enough over the life of the loan to justify a refinance by itself, unlike home loans), or B) re-amortizing the balance over a new loan period (i.e. you were two years into your 6 year loan, now you take the balance and stretch it out over a new 6 year time period) regardless of change (+ or -) in interest rate.
    Generally speaking, this could be a good move if you had a life change (loss of job, new child, increase in health insurance, ect.) and you aren't able to cover your debts. Better to refinance than miss a car payment and default on the loan. But generally if this is your motivation, it probably isn't a good idea.

    2)To save money over the long term
    People that refinance for this reason chose to do so by paying less (or having more) over the entire life of the loan. For example, lets say you have a loan with 5 years of payments left at $350 a month. You're paying (principal and interest) $21,000 more on that loan. Lets say that you choose to refinance and re-amortize over a 7 year time period. If you can pay less than $250 per month, you have a net gain, as you'll be paying less than $21,000 over the life of the loan, regardless of interest/term/monthly payment. Typically you're only able to do this by getting a lower interest rate.
    Or, alternatively, if you take the difference in car payments (in our example the $100) and invest it (either in your retirement account, or a taxable stock market account), and get the market average 9% growth per year, you'll end up with even more (in our example, $100 a month for 7 years at 9% interest gives you an end balance of roughly $11,000). Sometimes, it even justifies paying more on your car loan over the life of the loan if you can invest it and get a greater return (for example, if you took the same loan and refinanced it at $275 per month for 7 years, you'll pay $2,100 more in interest, but if you invested it you could have more than $8,100 in your account, making a net positive). All of that assumes you have the diligence to reinvest and not spend the savings.

    Typically, people that chose the first option do so under a consumer mindset. They end up losing out. Those that chose the second option do so under a wealth accumulation mindset, and end up gaining significantly.

    But probably too much information for a beekeeping forum.

  5. #4
    Join Date
    Feb 2017
    Location
    Byron, Il, USA
    Posts
    274

    Default Re: Thinking of Refinancing My Car Loan

    Ah, someone after mine own heart. I have never met anyone who actually refinanced for the purpose of reinvesting and making money on a car loan. I have heard of people taking out home loans for that purpose...but it strikes me a house of cards approach.

  6. #5
    Join Date
    May 2003
    Location
    Farmington, New Mexico
    Posts
    8,315

    Default Re: Thinking of Refinancing My Car Loan

    When I was a Scoutmaster I taught Personal Management. I used the difference in saving for a car and taking out a loan to buy a car to demonstrate the magic of compound interest. We also covered paying additional on mortgage principal each month.

    I'm trying to think of a situation in which refinancing a car makes sense, and I'm not finding a good reason to. It seems like it's just going to cost you more in the long run.
    Nobody ruins my day without my permission, and I refuse to grant it...

  7. #6
    Join Date
    May 2015
    Location
    Champaign, Illinois
    Posts
    2,461

    Default Re: Thinking of Refinancing My Car Loan

    Before you do anything ask yourself, "what could possibly go wrong?".
    If that don't work ask yourself, "what is the worst possible mess I could get myself into?" and play that movie all the way to the end.
    Refinancing an automobile seems like a way to get your transportation problems magnified.
    Imagine if the car needs some sort of major repairs during the term of the new loan. In that case you're screwed with interest and a nice fee.
    Internet credibility is an oxymoron

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