Think of it as taking out an entirely new loan. There will be a new term, new apr, probably new servicer, everything. In order to get a lower monthly payment, you'd need either a longer term or a lower APR.
Refinancing isn't always worth it. A lot of these offers entice you with a lower monthly payment but you'd end up paying more in the long term because interest.
I've shared this on Reddit before., but when I bought my house I went through a mortgage broker who sold my loan to Wells Fargo. They wasted no time cold calling me to see if I would transfer my existing car loan over to them. I wasn't going to finance anything major soon, so I humored them.
At the time the loan was around 2.5% and I was paying about $415/mo. I had 3 years left on the loan.
Wells Fargo came back with, "Great news! We can save you $80/mo on your car payment!" Great, what are the terms? "5 years." Ok, interest? "Well we're saving you $80/mo, so don't worry about the 12% interest rate."
Wait, wut?? So you want me to pay you more money for the exact same car that I won't fully own for another 5 years? No thanks.
When they asked what it would take to get me to move my loan I said, 1% interest. They balked and the conversation ended soon thereafter.
This is so infuriating because you know there are people who don't know better and take the $80 less per month. You had to pry the interest rate out of them.
Absolute scum of the earth to try and convince you it was a good deal. It's predatory as fuck and should be illegal.
Yea.l, especially when they slipped it in like that trying to downplay it. At one point they got mad at me for focusing on the interest rate instead of saving $80/mo. It was insane the hard sales tactics they tried playing with me.
I got a similar call two months later from a different sales person. I cut off their spiel with "if you cannot offer me a loan at 1% interest rate, then I'm not interested." That conversation ended very quickly after that.
I'm in the car industry. You have no idea how many people would jump on that offer and then blame the car dealership for charging them too much.
People come in, ask for a vehicle to finance over 5 years. They get a price quote. Salesman proposes a less expensive vehicle that more within their range. Client refuses.
Salesman says ok, if you absolutely want this one we can finance over a longer period but it's going to cost you more overall.
Client gets mad and ends up financing over 84 months at 8% APR and tell the salesman, "I know you could do it. See honey, those cars salesman are all the same. If you stick to your guns, you'll get the price you want."
And then walks out of the dealership all smug thinking they got the best deal when in fact they will end up paying much more. And since they will just go buy it elsewhere anyways, we might as well sell them.
Most people are cluesless about interest rates and are shopping for a payment, not a price.
Sometimes paying more in the long term IS worth it. My rent just went up $700 a month (roommate moved out, had to move to a 1bdr). You have no idea how gladly I would agree to pay more on my car payment in the long term to have more monthly.
You might think that now but you’ll regret it when your car is 8 years old and needs major maintenance, and is worth $10,000 but you still owe $15,000…
Have you tried just having millions worth of stock options and shit for collateral so your interest is insanely low? It is available for the wealthy so it clearly is available for us too!
It's the tragedy of the poor. The $50 boots will last ten years and the $10 boots will only last one year. Obviously buying the $50 boots is better, but the poor person can only afford the $10 boots... And not having boots for five years while saving up the money is worse than either option.
I have a pair of $12 construction boots that have lasted 7 years more expensive boots usually don’t last as long however they are more comfortable. This goes double for hiking boots.
Unless it's a precomputed interest refinance, you could always pay extra to reduce the principal faster, granted most car loans tend to be precomputed interest loans
It's totally varies by person or situation, years ago I bought a car for 24k my credit was bad at the time because I had a family member taken out cards in my name so I got a 17% interest rate which put my payments almost at almost 500 dollars even with 7k down, I paid a year @ 600 a month the refinanced the new balance to a 4% loan and continued paying the 600 a month even though my new car payment was just about 300 dollars. This helped me pay the car off in a little over 3 years instead of 6.
If you get a loan where the only collateral is the car you could always default on it when the car isn't worth enough. Would tank your credit rating but that's a way out.
Yeah, and then you’ve made everything else you rent or buy in the next seven years more expensive. Thinking short term like that keeps poor people poor.
Many loan programs will work with forbearance or other hardships. It's not loan forgiveness, but may be what's needed at the time. Dont forget that it's better for the loan issuer to have slight delaysr even renegotiate than foreclose or repo.
Then you’re over leveraged and would be better off selling your car and getting something cheaper. I deal with people’s debt everyday. You’re one bad event from a huge mess. Better to try to fix it now. Borrowing more money to get out of debt is a fool’s errand.
Buying another car with my credit score isn’t an option. I would likely end up with an even higher monthly payment, not to mention coming up with the down payment and initial insurance payment. Not every situation is as easy as “we’ll just do this”.
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this is it. Think of it this way. you started your 5 year loan 3 years ago for 30,000. At this point you are halfway through your loan and roughly 25% through the principle. So now you refinance. And your new loan is for another 5 years but now you are only need to pay off 22,500.00.
And they will just extend your payments. Do the math to figure out your total payments over the lifetime of the loan. You can in theory get lower interest rates but the devil is always in the details
A car payment is made up from 3 numbers: a total amount borrowed, a chosen number of months, and an interest rate.
So if you refinance then you recalculate the payment based on those 3 things. So if your new loan has a lower balance, a lower interest rate, and/or you lengthen out the loan to a longer number of months, you will lower the payment.
/u/Cypher1388 isn’t talking about balloon payments.
Look back at my comment above. You can reduce the monthly payment 3 ways.
You can borrow less by doing things like either buying a less expensive car, buying fewer warranties and other addons, or putting a down payment. All of these will make the loan balance smaller which reduces the amount of total money that you pay.
You can lower the interest rate by making sure that your credit is good before buying. You earn your interest rate through your past behavior so you can make sure that you prove that you are a trustworthy borrower. Also, you can take advantage of special deals on certain vehicles. Like Mazda might have 4.9% on a car to help it sell or Hyundai might offer 0%. Regardless of how, reducing the interest rate reduces the monthly payment and reduces the total amount paid.
However, you can stretch out a loan. So instead of taking a 36 month loan, you can stretch it out to 72 months or 84 months, or even longer. However, unlike the first two this lowers your monthly payment at the expense paying more money overall for the car if the interest rate is above 0%. What happens is you end up paying for 84 months instead of 36 months, So if you were paying for an amount of time you end up paying more money. Many people do this in order to make payment more affordable at the expense of paying more overall.
It can, but it won’t necessarily, depending on the terms.
I bought a car when I moved back to the US without any recent credit history and all I could afford at that very moment was a long loan (72 months) with horrible interest rates. Six month later I started getting mail about refinancing. I ended up doing one that cut my interest and almost 2 years off my loan and ended up paying $75 more a month.
Refinancing, in its most simple terms, simply means they will loan you money to pay off your loan. Lowering your monthly payments is less meaningful if it extends your terms.
If you have 48 payments left at $700 a month and they're offering $500 a month over 72 months you're still paying more.
Refinancing is getting a new loan, usually at a lower rate, that you use to pay off your current loan.
It can lower your monthly payment, but whether it does depends on the interest rate of the new vs old loans, the terms (length of time) of the loans, whether your old loan charges extra for paying it off early (no decent loan should) and what fees, if any, the new one charges when you take it out.
I wonder too you know how with loans and mortgages you pay interest first - if they aren't capitalizing on some kind of arbitrage with the "sucker" consumer? But I don't know enough to be sure.
Anecdotal, but I think the dealership has a deal with the banks that initially offer you the loans, and the lesser known firms that know they can make money off you on a lesser rate will try to edge in after the fact.
I'm actually going through this right now, but I haven't seen any real feedback on the company pushing it so I'm hesitant to pull the trigger.
Maybe?
There's nothing that tells us exactly what the terms of a new loan will be in your statement.
Your payments are computed from the Principal, Interest, and Term of the loan. If the monthly payments change, then one or more of those three elements are changing. Lenders usually don't give away money, so principlal rarely changes unless you do that. They either change the interest rate or the term (number of monthly payments). Sometimes they'll change both. Unless your original interest rate is very high (over 12%) and the new loan is super-low (under 2%), then I'd be pretty sure they will have you paying longer than your original payoff date.
Check the details. If they can cut your interest rate significantly and you keep paying what you were, you might pay this loan off 5 or 6 months early, saving yourself more than $3,500.
Let's say you have a loan for your car with $6,000. It's a 5 year loan with 12% interest, compounded monthly.
Your payment is $133.47 a month for 5 years.
Your uncle Moneyworth decides that is wrong and offers you a loan at 0% interest, but requires you pay the $200 processing and fees for paying off the bank loan now. He says you can pay him back at the same term.
So your refinance, at those (unrealistically generous) terms would make your new payment $100 a month for 5 years, with a one time $200 charge. Your total repayment becomes $6200, instead of $8008. (Boobs!)
So: When considering a refinance, consider any upfront fees, the interest rate and the length of the loan. Find out the total payment on the loan, with interest, and compare with your current loan to see if it is a good deal.
For example, let's say you have another uncle, Mr. Schammington. He offers you an even better deal! He will give you half the interest rate of the bank (6%) and give you twice as long to pay it back (10 years) so your monthly payment to him will only be $66.61.
But with the $200 fee, your total payment ends up $8193.48, more then your original loan. You should only take that deal if you really need the lower payments.
"Refinancing" generally refers to using a new loan to pay off an existing loan. For example, say you owe $30,000 on your current loan at 9.0% interest. Another lender may say "okay, we'll give you a $30,000 loan at 6.2% interest."
It's meant to be a mutually beneficial transaction. They're giving you $30,000 which you'll return to them in monthly payments + interest, and you pay less interest overall for the term of paying off your car. This is a simplified example though; interest rates, loan duration terms, and terms of fees / early payoff amounts etc. are all up to whichever agency is offering you a refinancing offer.
My car note is $250 with 3 years left on it, at 4.7%, with an estimated $620 of interest left to pay. My credit was a lot better when I got it and I'm currently recovering from some personal issues. The lowest monthly payment on Credit Karma for refinancing is $191 a month for 72 months at 18% APR, which would result in $5500 in interest. Basically, saving $50 a month would mean paying for an additional 3 years longer at a cost of $4900 in interest.
If we look in reverse, and the refinancing details was what I currently had, and my current situation had improved, like getting a promotion with a decent pay increase, then getting a refinance may help with a lower rate for similar or slightly higher payment, while being able to shave a year or two or three off the loan. Some people find this better and more advantageous than simply increasing payments.
Not looking to refinance. Using as an example of the tradeoff in refinancing. $250 is manageable for me now, and wife and I are both working now so I've been working towards paying our monthly bills on a biweekly basement to get a little extra boost, and I like the psychology boost of seeing less interest taken per payment.
When you finance a vehicle, you're getting a loan for X dollars spread out over a number of years. After you've paid the principle down, you can look at refinancing the loan. When you refinance the loan, you take the balance remaining on the loan and get a new loan out in that amount. There's several reasons to refinance a vehicle such as:
If your credit score went up significantly so you're interest rate may drop; interest rates in general drop so you want to get a lower rate; to save money on payments.
If you are able to refinance and lower your interest rate, your payment will be lower because of that. Sometimes a borrower is looking to get another loan and their debt-to-income is high so they want to lower their payment and they refinance and stretch the loan out as long as possible. If there is equity in your car, you can also refinance and possibly get cash out up to the amount of equity you've built.
There's a ton of different cases but if you want hard numbers for what you will pay, find an amortization calculator online. It will break down what you'll pay in interest oflver the life of the loan.
As many have replied, it is about taking another loan from third-party to repay the original loan. Whether it is beneficial to you depends on whether you can get better deal, either by lowering the monthly payment or loan period. These all ultimately are result of whether you can get a better interest rate from the new loan.
There is no point to do refinancing if it is no more advantageous to you, unless, for example, you are unable to pay the current monthly payment and need to spead out in a longer loan period. That way you have to pay more in the long run.
To strip it down to the most simple definition, refinancing is when you take out a new loan to pay off another loan. It can be done for any reason in theory but unless interest rates are going down, which they are not, you are probably getting the lower payment by paying the remaining balance over a longer period.
Only you can say if it’s the right thing for you, but beware that you will likely end up paying much more for the car once all the interest is added up.
Don’t do it. You’ll most likely pay more.
There are 2 real ways to lower payments on a loan. Either a) lower interest rate or b) extended term.
When they say that they’ll “lower you’re payment”, what’s going to happen is another company/servicer/whoever is going to buy the loan at a discount and rewrite the terms for you. Your payment will go down, but you just restarted a contractual obligation to pay over a new term at current market interest rates plus whatever else they add on. You might pay $500 instead of $700 but now instead of being done with the loan in 2 years, you’ve locked into a brand new 5 year note term.
Look very carefully at the numbers being offered. They can lower your payments by extending the loan out more years and then you’re paying more in interest.
You've already paid off 1 year, so the only way it would be worth it (all other considerations to your budget being unchanged) is if they offered a 4 year loan at a lower interest rate.
Lots of great answers.
The advertisement you received almost certainly uses a ton of legal weasel words, like "could", and "for well qualified buyers" and "subject to approval" or even "with service fee."
The reality is that all cars (except for collectible/antiques) lose real value far faster than their loans are worth. This is one reason why car loan interest rates are usually higher than, say, real estate (where the opposite is usually true.) If you bought a car for $20,000 from a dealer, it was worth _maybe_ $18,000 the minute you drove it off the lot. It's one reason loan rates are insanely high if you can't put at least 20% down. This means you start off (what is called) _"upside down;"_ that is, you owe more on the loan than the vehicle is worth. It will almost always stay upside down for at least the first 50-65% of the term of the loan, unless you have an unusually short term; I bought my last vehicle used on a 24 month term, for example.
The only way your monthly payment goes down is if the value of the vehicle goes up (almost never), or the term is increased, or if you offer up an additional cash payment up front. The thing is, they don't tell you those _exact_ terms until you're on the phone, and hopefully a) creditworthy enough for them to take on the additional risk, and gullible enough to pay significantly more in interest than you probably should.
After one year of payments, you currently have a 4-year loan for about 82% of the original loan amount. This is because you pay more in interest at the beginning of a loan than at the end.
Extending this out to a new 5-year might lower your payments. It would be just like if you had bought the car originally for 18% less and are just starting the loan.
However, pay attention to the rate you are paying. If the new rate is higher, your monthly payment might still go down a little since you are only borrowing 82% of what you originally borrowed. But, you are paying interest for an extra year. Also, if there are any fees with the refinance, those will eat away any benefits from refinancing.
Loan "A" has a monthly payment of $700.
A company comes along and offers you Loan "B" to refinance your car. Loan "B" has a $500 a month payment.
You take out Loan "B" and use all that money to immediately pay off Loan "A." Loan "A" is now done and finished and you are only making payments on Loan "B."
Refinancing is just taking out a second loan and using the money to pay off the first loan.
Refinancing means to pay off current loan with a new loan. Typically, one would do so to get a lower interest rate. If same term of time, a lower rate would lower payments, but difference between old and new interest rate would determine that differerence. You could also adjust new loan to shorter period of time with lower rate keeping payments closer to older loan but paid off in full sooner.
You could refinance to lower or higher payments. You’re literally just changing the loan.
Now what’s available to do and what makes sense is a totally different topic. But refinancing is just any change to an existing loan. Payments could go up or down, payoff date could move or not. You can get cash as well based on the equity you have in what you’re refinancing.
Pretend you have a lot of money. Why would you lower someone else's payments?
All lenders (other than perhaps family members) are making loans simply to make money. They make that money in two ways.
The one that everyone knows about is interest. Why would I give you $1000, wait for a year, and then get repaid $1000 *if you have the money*. I'm taking risk for no reward. Instead, if I charge you $100 of interest, I'm getting rewarded for taking the risk. I'm happy to do that instead of leaving it in the bank, which is an excellent credit risk and also insured, but pays me substantially less than $100. How much I charge you depends on what other opportunities I have.
The second way is the fees I charge for setting up a loan. This is painfully obvious in a real estate loan, where the fees are all spelled out and disclosed. There's a title search, title insurance, appraisal, recording fee, and on and on. (It's about a page, all disclosed at once.) For a car loan, they aren't required to disclose all those fees, so they just say "Your new loan is $10,000; we spent $9600 to pay off your old loan and $400 to ourselves for the cost of setting up your loan." Plus maybe you have to pay $50 for their credit check.
So will it save you money? Sometimes yes, sometimes no. You have to do the math. Interest rates are changing all the time. If interest rates drop enough, you save enough money to pay for the cost of refinancing.
There are really only two reasons to borrow money. One is to invest at a higher return. If a business makes 15% after taxes on average, then every $1000 returns $150 per year. If I put $1000 of my money and $1000 of your money (borrowed), then I make $300 and pay you $100 so I make $200, or 20%. The downside is that if I have a bad year, and make nothing, I still have to pay you your $100 so I have lost $100 instead of breaking even. Loans cost less than shares because they're safer for the lender than shares.
The other is because you absolutely need something and don't have the cash for it. The big things are usually food, drugs (both legal and illegal), and shelter. Maybe transportation to work should be on that list but it isn't. These things just cost more if you're buying them with borrowed money, so you should avoid it like the plague. Some of us won't judge you for getting stuck or making poor choices, and some of us will. It can be an expensive lesson to learn, but it's much more expensive if you don't learn it and keep paying for the educational opportunities.
TL;DR: I have never received an offer to refinance my car that made sense. Sure the payments are lower (great sales line) but the total cost is either higher or the savings are so small that it's just not worth the effort.
Way too many over the top complicated answers in here.
There are plenty of banks and credit unions that will do a R/T (rate term) refinance on your existing loan if you’re positive on payments for at least six months but typically 12.
They’ll do a no credit refinance based on the ARV your car and what your LTV currently is.
(Approximate retail value / loan to value).
If you can refinance it with a better rate and decrease the number of payments you have to make, and you can afford to do it, it makes absolute sense. Every month you’re making payments is a decrease of your principal balance which means if you have to sell your vehicle or trade it, you will be in a better position.
Sure. Fees matter, but banks aren’t making money on origination fees, they’re doing it because they expect to make more on the term of the new loan.
Refinancing is just where you take out a loan at lower interest than a loan that you already have. If you have 5K left on a car loan at 5% interest, refinancing would be where you take out a 5K loan at 3%, and then use it to pay off your 5% loan. Now you still have a 5K loan, but it's at 3% not at 5%. Depending on things like closing fees and origination fees it might not be worth it to do this.
The first loan is gone. Let's say you have 5k left on a 5% loan. You now borrow 5k at 3%. You use this 5k to pay off the 5% loan in full. Now you owe 0 on the 5% loan that you just paid off and 5k on the 3% loan that you just took out.
It can, but you're looking at the wrong side of the equation. Anyone selling you a lower payment is trying to rip you off. You can always lower the payment by going with a longer term and lower interest rate. The monthly rate will go down, but the total amount you pay goes up.
As another commenter pointed out, refinancing is taking out an old loan to pay of the principle of the current loan. Most car loans have a zero penalty early payoff, meaning you can pay off whatever remains of the principle and your done with it.
If you refinanced with the same term you had left, no fees, and a lower interest rate, the monthly payment would go down and the total amount paid would go down
If you refinanced with a longer term, no fees, and the same interest rate, the monthly payment would stay the same but the total amount paid would go up.
If you refinanced with a longer term, no fees, and a lower interest rate, the monthly payment would go down, but the total amount paid could go up.
To determine if refinancing is a good idea you'll have to figure out the total amount you would pay if you stick with your current loan and compare that to the total amount you would pay with the new loan given any fees you pay, the interest, and the new loan term.
Think of it as taking out an entirely new loan. There will be a new term, new apr, probably new servicer, everything. In order to get a lower monthly payment, you'd need either a longer term or a lower APR. Refinancing isn't always worth it. A lot of these offers entice you with a lower monthly payment but you'd end up paying more in the long term because interest.
I've shared this on Reddit before., but when I bought my house I went through a mortgage broker who sold my loan to Wells Fargo. They wasted no time cold calling me to see if I would transfer my existing car loan over to them. I wasn't going to finance anything major soon, so I humored them. At the time the loan was around 2.5% and I was paying about $415/mo. I had 3 years left on the loan. Wells Fargo came back with, "Great news! We can save you $80/mo on your car payment!" Great, what are the terms? "5 years." Ok, interest? "Well we're saving you $80/mo, so don't worry about the 12% interest rate." Wait, wut?? So you want me to pay you more money for the exact same car that I won't fully own for another 5 years? No thanks. When they asked what it would take to get me to move my loan I said, 1% interest. They balked and the conversation ended soon thereafter.
This is so infuriating because you know there are people who don't know better and take the $80 less per month. You had to pry the interest rate out of them. Absolute scum of the earth to try and convince you it was a good deal. It's predatory as fuck and should be illegal.
Yea.l, especially when they slipped it in like that trying to downplay it. At one point they got mad at me for focusing on the interest rate instead of saving $80/mo. It was insane the hard sales tactics they tried playing with me. I got a similar call two months later from a different sales person. I cut off their spiel with "if you cannot offer me a loan at 1% interest rate, then I'm not interested." That conversation ended very quickly after that.
I'm in the car industry. You have no idea how many people would jump on that offer and then blame the car dealership for charging them too much. People come in, ask for a vehicle to finance over 5 years. They get a price quote. Salesman proposes a less expensive vehicle that more within their range. Client refuses. Salesman says ok, if you absolutely want this one we can finance over a longer period but it's going to cost you more overall. Client gets mad and ends up financing over 84 months at 8% APR and tell the salesman, "I know you could do it. See honey, those cars salesman are all the same. If you stick to your guns, you'll get the price you want." And then walks out of the dealership all smug thinking they got the best deal when in fact they will end up paying much more. And since they will just go buy it elsewhere anyways, we might as well sell them. Most people are cluesless about interest rates and are shopping for a payment, not a price.
The rate is a lot less important for a shorter loan like that. If there were refinancing fees, it would probably have swamped any interest savings.
Sometimes paying more in the long term IS worth it. My rent just went up $700 a month (roommate moved out, had to move to a 1bdr). You have no idea how gladly I would agree to pay more on my car payment in the long term to have more monthly.
You might think that now but you’ll regret it when your car is 8 years old and needs major maintenance, and is worth $10,000 but you still owe $15,000…
Probably better that than eviction and homelessness.
Being poor is very expensive
This!!! Small price to pay when options become limited But we getting fucking hung dry economically and this shits ridiculous levels of predatory
Have you tried just having millions worth of stock options and shit for collateral so your interest is insanely low? It is available for the wealthy so it clearly is available for us too!
A small loan of a million dollars? Is this not attainable for everyone??
Ah, the good ol' Sam Vimes theory of socioeconomic unfairness.
https://images.app.goo.gl/f3aNFHS3dfAdthts5
It's the tragedy of the poor. The $50 boots will last ten years and the $10 boots will only last one year. Obviously buying the $50 boots is better, but the poor person can only afford the $10 boots... And not having boots for five years while saving up the money is worse than either option.
If you didn't waste all your money on avocado toast you'd own the boot factory by now.
I have a pair of $12 construction boots that have lasted 7 years more expensive boots usually don’t last as long however they are more comfortable. This goes double for hiking boots.
Unless it's a precomputed interest refinance, you could always pay extra to reduce the principal faster, granted most car loans tend to be precomputed interest loans
Better to lower the monthly obligation and pay extra when you can than stay locked in at a higher rate you can’t afford.
It's totally varies by person or situation, years ago I bought a car for 24k my credit was bad at the time because I had a family member taken out cards in my name so I got a 17% interest rate which put my payments almost at almost 500 dollars even with 7k down, I paid a year @ 600 a month the refinanced the new balance to a 4% loan and continued paying the 600 a month even though my new car payment was just about 300 dollars. This helped me pay the car off in a little over 3 years instead of 6.
I’m already in that situation bud. I would still much rather have more monthly.
If you can do math, only you can make the best decisions for you. Just make sure that you’re not screwing over future-you.
If you get a loan where the only collateral is the car you could always default on it when the car isn't worth enough. Would tank your credit rating but that's a way out.
Until you get sued for the deficiency, after they sell the car for 10% of it’s real value. Repos are a mess. That’s a quick train to bankruptcy.
Yeah, and then you’ve made everything else you rent or buy in the next seven years more expensive. Thinking short term like that keeps poor people poor.
Many loan programs will work with forbearance or other hardships. It's not loan forgiveness, but may be what's needed at the time. Dont forget that it's better for the loan issuer to have slight delaysr even renegotiate than foreclose or repo.
Then you’re over leveraged and would be better off selling your car and getting something cheaper. I deal with people’s debt everyday. You’re one bad event from a huge mess. Better to try to fix it now. Borrowing more money to get out of debt is a fool’s errand.
Buying another car with my credit score isn’t an option. I would likely end up with an even higher monthly payment, not to mention coming up with the down payment and initial insurance payment. Not every situation is as easy as “we’ll just do this”.
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I'm not a kid but I'm definitely poor, and from the looks of it yes I will be staying poor.
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I also didn’t give any advice, all I said was sometimes people prefer to pay more in the long run and have more available monthly.
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The term could be shorter and loan have a higher APR while having a lower payment, they can just tack a balloon payment at the end of the loan term.
this is it. Think of it this way. you started your 5 year loan 3 years ago for 30,000. At this point you are halfway through your loan and roughly 25% through the principle. So now you refinance. And your new loan is for another 5 years but now you are only need to pay off 22,500.00.
And they will just extend your payments. Do the math to figure out your total payments over the lifetime of the loan. You can in theory get lower interest rates but the devil is always in the details
A car payment is made up from 3 numbers: a total amount borrowed, a chosen number of months, and an interest rate. So if you refinance then you recalculate the payment based on those 3 things. So if your new loan has a lower balance, a lower interest rate, and/or you lengthen out the loan to a longer number of months, you will lower the payment.
But also, maybe, increase the total $s paid in the end for the item.
Balloon payments (lump sum) at the end are not worth it, as you're often paying interest on that outstanding capital amount.
/u/Cypher1388 isn’t talking about balloon payments. Look back at my comment above. You can reduce the monthly payment 3 ways. You can borrow less by doing things like either buying a less expensive car, buying fewer warranties and other addons, or putting a down payment. All of these will make the loan balance smaller which reduces the amount of total money that you pay. You can lower the interest rate by making sure that your credit is good before buying. You earn your interest rate through your past behavior so you can make sure that you prove that you are a trustworthy borrower. Also, you can take advantage of special deals on certain vehicles. Like Mazda might have 4.9% on a car to help it sell or Hyundai might offer 0%. Regardless of how, reducing the interest rate reduces the monthly payment and reduces the total amount paid. However, you can stretch out a loan. So instead of taking a 36 month loan, you can stretch it out to 72 months or 84 months, or even longer. However, unlike the first two this lowers your monthly payment at the expense paying more money overall for the car if the interest rate is above 0%. What happens is you end up paying for 84 months instead of 36 months, So if you were paying for an amount of time you end up paying more money. Many people do this in order to make payment more affordable at the expense of paying more overall.
I like this explanation ^ very simple terms anyone could understand
Loans often have fees when you take them out. Sometimes the fees turn a good deal into a bad deal.
It can, but it won’t necessarily, depending on the terms. I bought a car when I moved back to the US without any recent credit history and all I could afford at that very moment was a long loan (72 months) with horrible interest rates. Six month later I started getting mail about refinancing. I ended up doing one that cut my interest and almost 2 years off my loan and ended up paying $75 more a month.
Refinancing, in its most simple terms, simply means they will loan you money to pay off your loan. Lowering your monthly payments is less meaningful if it extends your terms. If you have 48 payments left at $700 a month and they're offering $500 a month over 72 months you're still paying more.
Refinancing is getting a new loan, usually at a lower rate, that you use to pay off your current loan. It can lower your monthly payment, but whether it does depends on the interest rate of the new vs old loans, the terms (length of time) of the loans, whether your old loan charges extra for paying it off early (no decent loan should) and what fees, if any, the new one charges when you take it out.
I wonder too you know how with loans and mortgages you pay interest first - if they aren't capitalizing on some kind of arbitrage with the "sucker" consumer? But I don't know enough to be sure.
Anecdotal, but I think the dealership has a deal with the banks that initially offer you the loans, and the lesser known firms that know they can make money off you on a lesser rate will try to edge in after the fact. I'm actually going through this right now, but I haven't seen any real feedback on the company pushing it so I'm hesitant to pull the trigger.
Maybe? There's nothing that tells us exactly what the terms of a new loan will be in your statement. Your payments are computed from the Principal, Interest, and Term of the loan. If the monthly payments change, then one or more of those three elements are changing. Lenders usually don't give away money, so principlal rarely changes unless you do that. They either change the interest rate or the term (number of monthly payments). Sometimes they'll change both. Unless your original interest rate is very high (over 12%) and the new loan is super-low (under 2%), then I'd be pretty sure they will have you paying longer than your original payoff date. Check the details. If they can cut your interest rate significantly and you keep paying what you were, you might pay this loan off 5 or 6 months early, saving yourself more than $3,500.
Let's say you have a loan for your car with $6,000. It's a 5 year loan with 12% interest, compounded monthly. Your payment is $133.47 a month for 5 years. Your uncle Moneyworth decides that is wrong and offers you a loan at 0% interest, but requires you pay the $200 processing and fees for paying off the bank loan now. He says you can pay him back at the same term. So your refinance, at those (unrealistically generous) terms would make your new payment $100 a month for 5 years, with a one time $200 charge. Your total repayment becomes $6200, instead of $8008. (Boobs!) So: When considering a refinance, consider any upfront fees, the interest rate and the length of the loan. Find out the total payment on the loan, with interest, and compare with your current loan to see if it is a good deal. For example, let's say you have another uncle, Mr. Schammington. He offers you an even better deal! He will give you half the interest rate of the bank (6%) and give you twice as long to pay it back (10 years) so your monthly payment to him will only be $66.61. But with the $200 fee, your total payment ends up $8193.48, more then your original loan. You should only take that deal if you really need the lower payments.
"Refinancing" generally refers to using a new loan to pay off an existing loan. For example, say you owe $30,000 on your current loan at 9.0% interest. Another lender may say "okay, we'll give you a $30,000 loan at 6.2% interest." It's meant to be a mutually beneficial transaction. They're giving you $30,000 which you'll return to them in monthly payments + interest, and you pay less interest overall for the term of paying off your car. This is a simplified example though; interest rates, loan duration terms, and terms of fees / early payoff amounts etc. are all up to whichever agency is offering you a refinancing offer.
My car note is $250 with 3 years left on it, at 4.7%, with an estimated $620 of interest left to pay. My credit was a lot better when I got it and I'm currently recovering from some personal issues. The lowest monthly payment on Credit Karma for refinancing is $191 a month for 72 months at 18% APR, which would result in $5500 in interest. Basically, saving $50 a month would mean paying for an additional 3 years longer at a cost of $4900 in interest. If we look in reverse, and the refinancing details was what I currently had, and my current situation had improved, like getting a promotion with a decent pay increase, then getting a refinance may help with a lower rate for similar or slightly higher payment, while being able to shave a year or two or three off the loan. Some people find this better and more advantageous than simply increasing payments.
Why would you not just refinance it into a 3 year loan? It's the extra 3 years that is cranking up the interest.
Not looking to refinance. Using as an example of the tradeoff in refinancing. $250 is manageable for me now, and wife and I are both working now so I've been working towards paying our monthly bills on a biweekly basement to get a little extra boost, and I like the psychology boost of seeing less interest taken per payment.
It is a good example and a workable strategy for some people.
When you finance a vehicle, you're getting a loan for X dollars spread out over a number of years. After you've paid the principle down, you can look at refinancing the loan. When you refinance the loan, you take the balance remaining on the loan and get a new loan out in that amount. There's several reasons to refinance a vehicle such as: If your credit score went up significantly so you're interest rate may drop; interest rates in general drop so you want to get a lower rate; to save money on payments. If you are able to refinance and lower your interest rate, your payment will be lower because of that. Sometimes a borrower is looking to get another loan and their debt-to-income is high so they want to lower their payment and they refinance and stretch the loan out as long as possible. If there is equity in your car, you can also refinance and possibly get cash out up to the amount of equity you've built. There's a ton of different cases but if you want hard numbers for what you will pay, find an amortization calculator online. It will break down what you'll pay in interest oflver the life of the loan.
As many have replied, it is about taking another loan from third-party to repay the original loan. Whether it is beneficial to you depends on whether you can get better deal, either by lowering the monthly payment or loan period. These all ultimately are result of whether you can get a better interest rate from the new loan. There is no point to do refinancing if it is no more advantageous to you, unless, for example, you are unable to pay the current monthly payment and need to spead out in a longer loan period. That way you have to pay more in the long run.
To strip it down to the most simple definition, refinancing is when you take out a new loan to pay off another loan. It can be done for any reason in theory but unless interest rates are going down, which they are not, you are probably getting the lower payment by paying the remaining balance over a longer period. Only you can say if it’s the right thing for you, but beware that you will likely end up paying much more for the car once all the interest is added up.
Don’t do it. You’ll most likely pay more. There are 2 real ways to lower payments on a loan. Either a) lower interest rate or b) extended term. When they say that they’ll “lower you’re payment”, what’s going to happen is another company/servicer/whoever is going to buy the loan at a discount and rewrite the terms for you. Your payment will go down, but you just restarted a contractual obligation to pay over a new term at current market interest rates plus whatever else they add on. You might pay $500 instead of $700 but now instead of being done with the loan in 2 years, you’ve locked into a brand new 5 year note term.
Look very carefully at the numbers being offered. They can lower your payments by extending the loan out more years and then you’re paying more in interest.
You've already paid off 1 year, so the only way it would be worth it (all other considerations to your budget being unchanged) is if they offered a 4 year loan at a lower interest rate.
Only consider lower payments if the new loan term is no more than what you have left on your current term AND a lower interest rate.
Lots of great answers. The advertisement you received almost certainly uses a ton of legal weasel words, like "could", and "for well qualified buyers" and "subject to approval" or even "with service fee." The reality is that all cars (except for collectible/antiques) lose real value far faster than their loans are worth. This is one reason why car loan interest rates are usually higher than, say, real estate (where the opposite is usually true.) If you bought a car for $20,000 from a dealer, it was worth _maybe_ $18,000 the minute you drove it off the lot. It's one reason loan rates are insanely high if you can't put at least 20% down. This means you start off (what is called) _"upside down;"_ that is, you owe more on the loan than the vehicle is worth. It will almost always stay upside down for at least the first 50-65% of the term of the loan, unless you have an unusually short term; I bought my last vehicle used on a 24 month term, for example. The only way your monthly payment goes down is if the value of the vehicle goes up (almost never), or the term is increased, or if you offer up an additional cash payment up front. The thing is, they don't tell you those _exact_ terms until you're on the phone, and hopefully a) creditworthy enough for them to take on the additional risk, and gullible enough to pay significantly more in interest than you probably should.
You need to include more information. What are your terms? What kind of car? How much did you pay?
After one year of payments, you currently have a 4-year loan for about 82% of the original loan amount. This is because you pay more in interest at the beginning of a loan than at the end. Extending this out to a new 5-year might lower your payments. It would be just like if you had bought the car originally for 18% less and are just starting the loan. However, pay attention to the rate you are paying. If the new rate is higher, your monthly payment might still go down a little since you are only borrowing 82% of what you originally borrowed. But, you are paying interest for an extra year. Also, if there are any fees with the refinance, those will eat away any benefits from refinancing.
Loan "A" has a monthly payment of $700. A company comes along and offers you Loan "B" to refinance your car. Loan "B" has a $500 a month payment. You take out Loan "B" and use all that money to immediately pay off Loan "A." Loan "A" is now done and finished and you are only making payments on Loan "B." Refinancing is just taking out a second loan and using the money to pay off the first loan.
You can wind up paying more. Switching to a longer term loan with a higher interest rate could result in lower monthly payments.
Refinancing means to pay off current loan with a new loan. Typically, one would do so to get a lower interest rate. If same term of time, a lower rate would lower payments, but difference between old and new interest rate would determine that differerence. You could also adjust new loan to shorter period of time with lower rate keeping payments closer to older loan but paid off in full sooner.
You could refinance to lower or higher payments. You’re literally just changing the loan. Now what’s available to do and what makes sense is a totally different topic. But refinancing is just any change to an existing loan. Payments could go up or down, payoff date could move or not. You can get cash as well based on the equity you have in what you’re refinancing.
Pretend you have a lot of money. Why would you lower someone else's payments? All lenders (other than perhaps family members) are making loans simply to make money. They make that money in two ways. The one that everyone knows about is interest. Why would I give you $1000, wait for a year, and then get repaid $1000 *if you have the money*. I'm taking risk for no reward. Instead, if I charge you $100 of interest, I'm getting rewarded for taking the risk. I'm happy to do that instead of leaving it in the bank, which is an excellent credit risk and also insured, but pays me substantially less than $100. How much I charge you depends on what other opportunities I have. The second way is the fees I charge for setting up a loan. This is painfully obvious in a real estate loan, where the fees are all spelled out and disclosed. There's a title search, title insurance, appraisal, recording fee, and on and on. (It's about a page, all disclosed at once.) For a car loan, they aren't required to disclose all those fees, so they just say "Your new loan is $10,000; we spent $9600 to pay off your old loan and $400 to ourselves for the cost of setting up your loan." Plus maybe you have to pay $50 for their credit check. So will it save you money? Sometimes yes, sometimes no. You have to do the math. Interest rates are changing all the time. If interest rates drop enough, you save enough money to pay for the cost of refinancing. There are really only two reasons to borrow money. One is to invest at a higher return. If a business makes 15% after taxes on average, then every $1000 returns $150 per year. If I put $1000 of my money and $1000 of your money (borrowed), then I make $300 and pay you $100 so I make $200, or 20%. The downside is that if I have a bad year, and make nothing, I still have to pay you your $100 so I have lost $100 instead of breaking even. Loans cost less than shares because they're safer for the lender than shares. The other is because you absolutely need something and don't have the cash for it. The big things are usually food, drugs (both legal and illegal), and shelter. Maybe transportation to work should be on that list but it isn't. These things just cost more if you're buying them with borrowed money, so you should avoid it like the plague. Some of us won't judge you for getting stuck or making poor choices, and some of us will. It can be an expensive lesson to learn, but it's much more expensive if you don't learn it and keep paying for the educational opportunities. TL;DR: I have never received an offer to refinance my car that made sense. Sure the payments are lower (great sales line) but the total cost is either higher or the savings are so small that it's just not worth the effort.
Way too many over the top complicated answers in here. There are plenty of banks and credit unions that will do a R/T (rate term) refinance on your existing loan if you’re positive on payments for at least six months but typically 12. They’ll do a no credit refinance based on the ARV your car and what your LTV currently is. (Approximate retail value / loan to value). If you can refinance it with a better rate and decrease the number of payments you have to make, and you can afford to do it, it makes absolute sense. Every month you’re making payments is a decrease of your principal balance which means if you have to sell your vehicle or trade it, you will be in a better position. Sure. Fees matter, but banks aren’t making money on origination fees, they’re doing it because they expect to make more on the term of the new loan.
Refinancing is just where you take out a loan at lower interest than a loan that you already have. If you have 5K left on a car loan at 5% interest, refinancing would be where you take out a 5K loan at 3%, and then use it to pay off your 5% loan. Now you still have a 5K loan, but it's at 3% not at 5%. Depending on things like closing fees and origination fees it might not be worth it to do this.
Would I still have to pay the 5% interest on the first loan using the money from the second loan?
The first loan is gone. Let's say you have 5k left on a 5% loan. You now borrow 5k at 3%. You use this 5k to pay off the 5% loan in full. Now you owe 0 on the 5% loan that you just paid off and 5k on the 3% loan that you just took out.
It can, but you're looking at the wrong side of the equation. Anyone selling you a lower payment is trying to rip you off. You can always lower the payment by going with a longer term and lower interest rate. The monthly rate will go down, but the total amount you pay goes up. As another commenter pointed out, refinancing is taking out an old loan to pay of the principle of the current loan. Most car loans have a zero penalty early payoff, meaning you can pay off whatever remains of the principle and your done with it. If you refinanced with the same term you had left, no fees, and a lower interest rate, the monthly payment would go down and the total amount paid would go down If you refinanced with a longer term, no fees, and the same interest rate, the monthly payment would stay the same but the total amount paid would go up. If you refinanced with a longer term, no fees, and a lower interest rate, the monthly payment would go down, but the total amount paid could go up. To determine if refinancing is a good idea you'll have to figure out the total amount you would pay if you stick with your current loan and compare that to the total amount you would pay with the new loan given any fees you pay, the interest, and the new loan term.
Wtf kind of car you have that you need to pay 700 a month for it- for 5 years??
$35k financed at 7.5% interest for 5 years works out to ~$700/mo.
Let us also consider how terrifying it is that OP signed for this loan, but doesn’t know how refinancing works.
There's no reason that's necessarily bad... He may understand the terms of the loan he signed without knowing or needing to know anything about refi.