Should You Refinance Your Car Loan?

The following was originally posted October 2, 2008 , updated 10/23/09.

Cutting out little luxuries like a morning latte or dinner at a restaurant only goes so far to reduce expenses. To really make an impact you've got to look at your current expenses with a new perspective. Like you car payments. When was the last time you looked at your payment? Have you ever even considered that you might be able to lower those payments? Chances are good that an autoloan refinance could give you some relief each month. But don’t just look at your monthly payment before deciding to refinance.

Refinancing for longer terms could end up costing even more over the life of the loan. Say for example you’ve got a $15,000 auto loan at 12% written for 60 months. Your current payment is $360 each month. The total amount you’ll pay when the loan is finished is $21,622. You’ve just completed the 2nd year of payments, so you’ve already paid 24 payments or $8,640. Your remaining balance is $12,982.

You refinance the loan at a lower rate of 8%. This time you’re refinancing the remaining balance of $12,982. If you choose another 60 month loan your monthly payment would be just $263.22—nearly a $100 savings in your monthly budget. That would definitely relieve the strain. But over the life of this loan you’d pay $15,793. Add that to the $8,640 you’ve already paid and you’ve spent $24,433 on a $15,000 car.

But what would happen if you were to refinance at the same 8% rate and shorten the terms to 48 months? You’re payment would be slightly lower than the original loan at $317. And at the end of the refinanced loan you would have paid $15,216. So again you’d be paying almost $3,000 more than the original loan.

Refinance at shorter terms—say another 3 years and you’re payments are higher than what you are currently paying--$407, but your total cost only goes down to $14,645. Add on the $8,640 you paid previously and you’ve spent $23,285.

So what you need to decide is which is more important. Paying less overall or reducing your monthly payment and paying a bit more in total? Does that $3,000 matter to you? Maybe you’d be better off investing that money? But then again, it’s not like you’ve got that cash lying around. If you do you shouldn’t be considering this scenario at all. Remember, the name of the game is to reduce debt.

Should You Use Your Home to Pay for College?

I saw this headline the other day on a bank website, “Home Equity loans have better rates than student loans”. Really? Hey, I think home equity loans and lines of credit are great. They’re useful for all kinds of things, they are usually low-interest and they have nice tax advantages, but I questioned whether home equity rates were really better. I had to check it out, so I paid a visit to SallieMae.

Federal student loan rates dropped in July. Stafford loans—for loans first disbursed July 1, 2009–June 30, 2010, the interest rate is fixed at 5.6%. Plus loans are set at a fixed rate of 8.5%. These rates are adjusted annually and depend on when funds were dispersed. Still, the Stafford loan is not only good, but it's even lower over the next few years.

In comparison to home equity lines of credit (HELOC) the federal rates are not great. Private student loans can be much higher. The Sallie May Smart Option (not federally funded) carries a rate of 11.47%.

But the biggest difference between specific student loans and using your home equity is in the payoff schedule. Home equity loans and lines of credit are paid back monthly as soon as the money is dispersed. You won’t start making payments on student loans until after graduation. That’s also true if you’re a parent and have taken out a Federal Parent Plus loan.

HELOCs also carry tax advantages. Interest on a home equity loan could be fully tax deductible, while interest on student loans allow for a fixed maximum deduction each year on the interest paid. You’ll need to check with a tax expert about your particular situation.

Using a home equity loan or line of credit can be a smart option. Just remember that the reason this loan is lower is because you are using your home as collateral. Be confident that you can pay off the loan or you put your home in jeopardy.

Home Improvements Better the Economy

I have this my friend down the street that I'll simply describe as fiscally fortunate. For years everyone has been asking him why he doesn't move his family into a bigger house across town. His answer, "Why would I?" And now he's just finished remodelling his entire house, not to make it bigger, but to better suit his family. Is this smart during an economic downturn?

Oh yeah, this guy is very smart. He's living well in house that meets his needs within a smaller space and smaller mortgage. Sure he might be able to afford the bigger home, but he doesn't want to take a gamble with his good fortune.

And then there is my friend, Bob. He popped in the other day to chat and seek job references. He stops in every couple of months like this. He was finishing a basement down the street and wondered if I knew of anyone needing remodelling. Bob did our basement about 3 years ago. He did good work so we've recommended him to several other people. What was remarkable about this visit was that Bob said this is the first job he's had in six months.

"Really," I was surprised, but shouldn't have been I guess. But, I look down our street and see the wave of "For Sale" signs that have sprouted as they do every spring. Of course there are probably a variety of reason for the moves. But I'd bet that not everyone needs to move.

Loan rates on home equity loans and lines of credit are really good right now. Selling a house, however, is tough. Improving your existing home could save you money and add to the value of your home. And just think, you might even get a better price for your house sometime in the future.

Remodeling projects, or the lack of have an affect on the overall economy. When people like Bob are unemployed so is his assistant, his electrician, the plumber, the carpet layer, the painter and the tiler. Then when these people are out of work they're not ordering supplies and the suppliers aren't restocking their inventory and the factories produce less and layoff workers. Conversely when Bob and his team are working everything starts rolling again. The whole thing is interconnected.

Credit unions have money to lend

My friend was shocked, "I just got my mortgage statement and they (the bank) lowered my home equity line of credit. How could they do that?" He's talking about the credit available. He's upset because he was planning to use the line this spring to make some home improvements. He couldn't understand why this happened when he's never even touched the loan in 5 years.

Well, that was about a month ago and lots more people have discovered their in the same spot as financial institutions tighten up lending. So what are you supposed to do if you've got good credit and a desire for a loan. Wasn't the financial bailout supposed to encourage lenders to give out money?

That was the theory and while nobody should have expected that bailout to turn things around immediately, consumers in search of loans are not seeing much change. And then there are credit unions.

Credit unions are waving their cash filled arms saying "we're here! we're here!" That's especially so when it comes to mortgages and home equity loans. That's because the majority of credit unions have been involved in the risky subprime mortgage mess.

As journalist Broderick Perkins tells it in Reality Times, an online real estate journal:

Credit unions didn't need a bail out during the Great Depression, they didn't need federal intervention during the Savings & Loan debacle and they don't need government assistance now.

Because of the cooperative structure of credit union there is little encouragement of excessive risk taking. As a result, credit unions experience extremely low net loss rates in general and even in current conditions. The conservative operating style of credit unions also explains why they remain very well capitalized today--thus ready to lend money now.

So if you're looking to purchase a home, take out a home equity loan or buy a car your credit union is ready and willing to lend. They'll also give you an honest loan that won't bite you later.

Could you cut your bills by refinancing your auto loan?

With prices in the stratosphere, cutting out little luxuries like a morning latte or dinner at a restaurant only goes so far, especially if you own an SUV or family minivan. Maybe you could refinance your auto loan? It certainly could give you some relief each month. But don’t just look at your monthly payment before deciding to refinance.

Refinancing for longer terms could end up costing even more over the life of the loan. Say for example you’ve got a $15,000 auto loan at 12% written for 60 months. Your current payment is $360 each month. The total amount you’ll pay when the loan is finished is $21,622. You’ve just completed the 2nd year of payments, so you’ve already paid 24 payments or $8,640. Your remaining balance is $12,982.

You refinance the loan at a lower rate of 8%. This time you’re refinancing the remaining balance of $12,982. If you choose another 60 month loan your monthly payment would be just $263.22—nearly a $100 savings in your monthly budget. That would definitely relieve the strain. But over the life of this loan you’d pay $15,793. Add that to the $8,640 you’ve already paid and you’ve spent $24,433 on a $15,000 car.

But what would happen if you were to refinance at the same 8% rate and shorten the terms to 48 months? You’re payment would be slightly lower than the original loan at $317. And at the end of the refinanced loan you would have paid $15,216. So again you’d be paying almost $3,000 more than the original loan.

Refinance at shorter terms—say another 3 years and you’re payments are higher than what you are currently paying--$407, but your total cost only goes down to $14,645. Add on the $8,640 you paid previously and you’ve spent $23,285.

So what you need to decide is which is more important. Paying less overall or reducing your monthly payment and paying a bit more in total? Does that $3,000 matter to you? Maybe you’d be better off investing that money? But then again, it’s not like you’ve got that cash lying around. If you do you shouldn’t be considering this scenario at all. Remember, the name of the game is to reduce debt.

2 Ways Your Home Can Help in Tough Times

Wow! Yesterday was one scary day in the financial world. With the Stock Market plunge in wake of Lehman Bros. demise, trouble at AIG, the sale of Merrill and WAMU's downgrade to junk status. If it wasn't clear before it certainly should be everyone's priority now to protect your assets. All the old standard advice applies: cut expenses, continue savings, and work to eliminate debt. But I've also got a few ideas for you if you currently own a home and aren't in danger of foreclosure.

#1 Now is the time to refinance. Loan rates have fallen and they'll continue to fall. I'm not attempting to predict the future, but indications are that the economy will continue to slide and take more financial institutions down with it. (Your credit union is doing fine, btw.) But loans may not be easy to come by as credit lending becomes tighter. So to wait for rates to fall even more is a gamble. Refinance your loan now to start saving your personal money. Sock away the savings by contributing it to your IRA or opening a higher paying savings account. Consider CDs which pay a bit more and try to go for terms that are less than 5 years. That way you're funds will be easier to get.

#2 Get a Home Equity Loan. Okay this might sound crazy since most talk right now is about saving money and here I am telling you to get a loan. But here's the thing. We don't know what's around the corner. Home equity loans and lines-of-credit can be used as a bit of a safety net if you should need cash. Use it wisely and don't use for any old thing like buying new furniture or a vacation. Keep it in case things get really rough. But again, seek a home equity loan now, before credit lending gets tighter.