genki

When I purchased my car recently I wanted to keep my monthly payment low. I ended up taking a long time period loan to keep the monthly low. This will kill me with extra interest in the long run.

How can I mitigate this now ?

I have recently found out that I can now afford a higher payment each month, maybe $100 bucks more a month.

Should / Can I refinance now ?

I've only just made my first payment on the car by the way.

Thanks

FourDs

Whether you can refinance depends on the language in your financing agreement. There may be a minimum period of time you can wait before you can refinance.

I'd suggest you just make the greater payments on the loan you have now. Your rate may be a bit higher on a 72 (i'm assuming that's what you got?) than a 60 month loan, but probably not more than 1% (guess-timating). Just pay $100 extra and plan to pay off the loan sooner than 72 months.

That's what I'd do. Don't know what others suggest.

Boston Driver

...if the interest rate on the shorter term loan is about the same as teh loan you currently have, just pay the extra $100 a month and you will just pay it off earlier. That way, if things get tight, you afre not locked into a higher monthly payment, and you can opt to skip that extra $100 here and there if needed.

If there is significant decrease in the interest rate itself, then it might be worth it to refinance the car loan, but make sure that there are no prepayment penalties, etc. to get out of the existing contract.

Good luck!

javanator

Refinancing any type of loan is not always the most cost effective way to pay a loan off earlier. In most cases, refinancing any type of loan costs you money out of your pocket.

You're most likely better off making an extra payment each month. By doing this you'll realize a couple of benefits.

(1) You will pay off your loan in a shorter amount of time, thus paying out less total interest over the life of the loan than if you only made your required payment each month. By lowering your total interest paid over the life of the loan, you're basically lowering the APR you will realize. Interest you pay on a loan is always calculated from your outstanding loan principal (balance) at the start, or end, of each payment period. If you pay extra against your principal, your next periods payment will have less associated with the interest paid, and more will be applied against your principal. It can make a huge difference! On a low interest loan, just making an extra $50-$100 payment against principal can make a huge difference.

(2) You're credit rating will increase if you pay off loans earlier than expected -- assuming you are never late with a payment. Having a good credit rating will increase your chances to get better finance rates on future loans.

My wife and I did this for our both our Audi and our house.

If you make extra payments, write a separate check for the amount. In the memo line of your check, write "To be applied as additional principal payment only for loan #<write your loan number>". I also write this on the lender provider coupon we send in with our payment, but include the words..."Check #<whateverchecknumberis> for $<whatevertheamountis> is to be applied as additional principal payment only for blah blah blah".

DWP

Excellent advice, 'naut! If he does refi the loan, be sure to shop for the best terms.

genki

Re: If I pay extra, can I say "apply as principal only" ?

javanator

It's just basic Finance 101 talking.

Everyone would greatly benefit from knowing and understand what an amortization schedule for a loan is, and how it works. Very simple to create one in a spreadsheet. Understanding of an amortization schedule will empower you with valuable understanding on how money borrowing works, and in those situations help you to determine weather paying off a loan early is monetarily more beneficial than refinancing.

An amortization schedule will have for each payment period a column for payment amount, principal payment amount, interest payment amount and principal balance. Add an extra column called additional principle payment and play with different numbers/values in that column. If you do this with your home loan (ie: a large loan), you would be amazed at what the numbers show you just by putting very reasonable/affordable amounts into the additional principal payment.

Now with leases, I'm clueless. I've never leased anything in my life. I usually buy things for the long-term (pay to own something and works towards eventually eliminating that monthly payment), so leasing in some ways go against that type of thinking.

javanator

problems/issues with how the lender applies your additional payment(s).

Some "bad" lenders will want to apply your additional payments towards the interest on your loan. They call this "prepaying your interest". Don't do this or let it happen. It only benefits the lender and not you. Prepaying principal benefits you and not the lender.

I always write a separate check for any additional payments to send with a separate check for the amount the lender is expecting from me. Don't just write a single check for more than your payment. For me, I don't want some data entry person having to do some math or making a decision on how to handle a check for more than what they are expecting me to pay.

By including the words "additional" and "payment", it just makes it very clear what you want them to do with it. Also, that is why I also include the same verbage on the coupon you send in. I forgot to mention....that the wife and I also take and file photocopies of both the check and the coupon with our verbage written on it. Call it ****, but if there's ever a problem with how the lender applies our payments, I have my documented proof on all our payments ready to go.

This strategy was actually something I learned/heard years ago from my favorite college professor in a Finance 101 class.

The wife and I followed this strategy on our house, and I'm sure it contributed to making our credit ratings extremely high/good. When I financed our Audi through Audi Financial at the dealer, the F&I manager was pretty much floored that both my wifes and mine credit ratings were so high -- she commented that she saw such high ratings "occasionally" in much older people than ourselves.

genki

Re: Thankyou for you excellent advice, I will confirm my loan details with Audi Financial

Poorer than I look

The ONLY reason to refinance is if you can lower your interest rate, which you can SOMETIMES do through a credit union for a lower rate. It is highly unlikely that Audi will refi you for a lower rate unless you owe significantly less than the value of the vehicle and you bought when rates were high or your credit sucked.


Car loans are simple interest, so the interest accures on the balance remaining, no matter what it is. Making bigger payments early means you are paying down the principal that the interest is recalculated on each month.


Make bigger payments. Even if you have a penalty, it is assessed on amount of the final payment (usually). If you won the lottery today, your next payment would be balance - $1. Your last payment would be 1 dollar and have a penalty of around 7 cents.

Also, (if you don't refi) your minimum monthly payment is still the same, so if 1 month you are short, your liability hasn't gone up.