Saving money and being able to keep more money in my pocket each month sounds great, sign up me, right?
Not so fast, there’s a couple of things that need to be checked before I speak to my banker.
Know Your Interest Rate
We purchased our van two years ago using a 5 year loan at a 1.99% interest rate. The rate offered by my bank on a vehicle refinance loan is 3.61%, nearly double my current interest rate!
Check The Amortization Schedule
The paperwork given to me at the time we purchased our vehicle came with an amortization schedule showing how much of every payment is applied to the principal, and how much is paid in interest. Using the information from the paperwork, I can determine how much interest I have left to pay. Next, I can use a loan calculator to plug in the new loan information and get an amortization schedule for my potential auto refinance. If the interest paid for the new loan exceeds the interest remaining to be paid on my existing loan, refinancing will not save me money!
Do The Math
Let’s look at an example:
Let’s say I financed $30,000 at 1.99% for 60 months. Two years into my loan, here is the pertinent information:
- Balance: $17,861.39
- Monthly Payment: $525.70
- Interest Paid: $1,003.93
- Interest Yet To Pay: $508.54
Now, let’s look at what would happen if I refinanced my van today with the offered rate of 3.61% for a brand new 60 month term.
- Balance: $17,861.39
- Monthly Payment: $325.80
- Interest Paid: $0
- Interest yet To Pay: $1,687.20
Many people will look at this information and see that the payment is reduced by $200 a month and think that refinancing the vehicle is a great idea. That’s what your bank wants you to think.
The reality is refinancing would actually COST MORE money.
First, the clock on the term of my loan is restarted. With my original loan I had three years remaining. Should I refinance the vehicle, I get a brand new five year loan meaning I’ll be making payments on my vehicle for a total of seven years (2 years already paid PLUS the new 5 year term).
Because the term is restarted, the amount of interest I will pay increases. During the first 2 years of the original loan, I paid $1003.93 in interest. I will now pay $1687.20 during the new 5 year loan, meaning I will pay a total of $2691.13 in interest. Had I simply finished out my original loan, I would have paid a total of $1512.47.
Refinancing would cost an extra $1178.66!!
Sometimes life circumstances require a refinance of this type to create breathing room in the monthly budget if money is tight. That is not the case for me, therefore I will NOT be refinancing my auto loan.
Interest rates, terms, and other conditions will vary to your personal situation. The moral of the story here is before refinancing your vehicle, don’t get hypnotized by a lower monthly payment. Evaluate the numbers, do the math, and make an educated decision that’s best for you.
Have you ever refinanced an automobile loan? Did you do the math to determine if it actually saved you money first?
Brought to you courtesy of Brock