Car Finance

[r83osu]

Last year I had my parents cosign a car loan for me to get the absolutely lowest interest rate available (1.24%), with the agreement that I would apply for a loan this year once I've strengthen my credit score.

Fast forward today, I applied for a "new" car loan and received their lowest possible rate of 1.49% (1.24 was a promotion they were running)

DCU is offering me continue the balance of the loan term (48 months) or start over with 60 months.
They tell me my car is worth 25,500, I have a pay off balance of 19,000.

As of now my payments have been at $400 and with the new rate, it'll bump it up a few dollars.

Is there any benefit to me extending the loan to 60 months (other than a lower monthly payment), and continue to pay $400 even though the minimum payment will be $340? The rate of 1.49% doesn't change unless I ask for something over 60 months.

I plan on driving this car into the ground.

 

[Vdubchaos]

Last year I had my parents cosign a car loan for me to get the absolutely lowest interest rate available (1.24%), with the agreement that I would apply for a loan this year once I've strengthen my credit score.

Fast forward today, I applied for a "new" car loan and received their lowest possible rate of 1.49% (1.24 was a promotion they were running)

DCU is offering me continue the balance of the loan term (48 months) or start over with 60 months.
They tell me my car is worth 25,500, I have a pay off balance of 19,000.

As of now my payments have been at $400 and with the new rate, it'll bump it up a few dollars.

Is there any benefit to me extending the loan to 60 months (other than a lower monthly payment), and continue to pay $400 even though the minimum payment will be $340?

I plan on driving this car into the ground.

Extending the loan = more profits for them

Your best bet is to pay off the loan ASAP. Faster you pay it, less they make.

 

[NutBucket]

Given the rate is so low you it doesn't really matter. You can extend the loan and make bigger payments too. Most of the time there's no pre-payment penalty.

 

[r83osu]

Given the rate is so low you it doesn't really matter. You can extend the loan and make bigger payments too. Most of the time there's no pre-payment penalty.

Since I'm making the bigger payments, wouldn't more get applied to the principal balance?

I just have it set to auto-deduct 400 every month, which would be a $60 overpay every month. Not sure I'm understanding it correctly myself.

 

[repoman0]

Extending the loan = more profits for them

Your best bet is to pay off the loan ASAP. Faster you pay it, less they make.

Fail advice

The OP owes $19k at 1.49% either over 48 months or 60 months. He will pay around $330 / month at 60 months or around $410 / month over 48. Total interest paid over the life of the loan in the two cases:

48 months: $583
60 months: $730

A whopping $150 bucks difference over the lifetime of the loan for an extra $80 / month that can EASILY earn way more than 1.49% in safe investments or even just put into a 0.9% savings account.

Go for the longest term you can at that rate, save the difference and pay it off early if you feel the need, OP

edit: If you pay the same $410/month in either case, the "official" term of the loan makes no difference. Personally I'd keep the extra $80/month and do something else with it (invest, not waste or spend), with a rate that low.

 

[r83osu]

Fail advice

The OP owes $19k at 1.49% either over 48 months or 60 months. He will pay around $330 / month at 60 months or around $410 / month over 48. Total interest paid over the life of the loan in the two cases:

48 months: $583
60 months: $730

A whopping $150 bucks difference over the lifetime of the loan for an extra $80 / month that can EASILY earn way more than 1.49% in safe investments or even just put into a 0.9% savings account.

Go for the longest term you can at that rate, save the difference and pay it off early if you feel the need, OP

edit: If you pay the same $410/month in either case, the "official" term of the loan makes no difference. Personally I'd keep the extra $80/month and do something else with it (invest, not waste or spend), with a rate that low.

This is what I was thinking! I just didn't know if that was right way to go about it. While talking to the loan officer, I felt it was in my favor to go for the longer term and pocket the $60-80 or just continue to over pay the loan.

I calculated the difference in interest and I considered it negligible for me.

If I do over pay the monthly payment, will that benefit my credit score/report in anyway?

 

[Vdubchaos]

Fail advice

How do you qualify that as fail advice. Only in America paying off debt faster = fail I guess.

It's ALWAYS better to pay off ANY debt FAST.

Even if it saves you $100 bucks or so.

I'm not saying your advice is "fail", it's fine....low % and low interest paid anyways.

What if OP losses a job and can't pay that loan and it blows up into 30% interest during that extra 12 months he is paying......

Better safe than sorry.

 

[ghost recon88]

Wow that is a great rate! Is that on a new car or used?

 

[repoman0]

How do you qualify that as fail advice. Only in America paying off debt faster = fail I guess.

It's ALWAYS better to pay off ANY debt FAST.

Even if it saves you $100 bucks or so.

I'm not saying your advice is "fail", it's fine....low % and low interest paid anyways.

What if OP losses a job and can't pay that loan and it blows up into 30% interest during that extra 12 months he is paying......

Better safe than sorry.

Just saying, there's no point trying to spite the "evil bank" for making more profit by offering a longer loan, because they're barely making anything at all from that loan and perhaps even losing after inflation.

If OP loses a job, he'll have that extra $80/month saved up, can continue to pay only $330/month instead of $410 using that savings, and will have a larger safety net in general. I would argue that "better safe than sorry" is better followed by not committing to a larger payment for no reason at all.

Disagree that it's always better to pay off all debt fast. Those who know how the system works can end up far ahead by carefully managing debt.

If I do over pay the monthly payment, will that benefit my credit score/report in anyway?

I don't believe it will make a difference either way, at least not an appreciable one .. but don't quote me on that

 

[r83osu]

Wow that is a great rate! Is that on a new car or used?

Check them out! DCU.org

Last year I got 1.24% on a new car - due to my parents credit score and them being nice enough to let me have them cosign.

Since then, they raised it to 1.49% new or used.

Direct deposit is required, but it being a credit union and part of the co-op, I don't have any issues withdrawing money from a local credit union near me.

 

[jlee]

How do you qualify that as fail advice. Only in America paying off debt faster = fail I guess.

It's ALWAYS better to pay off ANY debt FAST.

Even if it saves you $100 bucks or so.

I'm not saying your advice is "fail", it's fine....low % and low interest paid anyways.

What if OP losses a job and can't pay that loan and it blows up into 30% interest during that extra 12 months he is paying......

Better safe than sorry.

If your idea of 'investment' is cash stuffed under your mattress, then sure.

With an average 7-8% rate of return, you're better off investing money instead of paying off a loan with a very low rate.

 

[r83osu]

Just saying, there's no point trying to spite the "evil bank" for making more profit by offering a longer loan, because they're barely making anything at all from that loan and perhaps even losing after inflation.

If OP loses a job, he'll have that extra $80/month saved up, can continue to pay only $330/month instead of $410 using that savings, and will have a larger safety net in general. I would argue that "better safe than sorry" is better followed by not committing to a larger payment for no reason at all.

Disagree that it's always better to pay off all debt fast. Those who know how the system works can end up far ahead by carefully managing debt.



I don't believe it will make a difference either way, at least not an appreciable one .. but don't quote me on that

I understand that paying a loan off more quickly is generally favored but for me personally, I think I am OK with extending the loan an extra year, if that means I'm able to pocket an extra $80 a month or apply it to the loan. While most likely I'll continue to overpay by ~$80, it's nice to know that I have lower payments just in case I was to lose my job or some financial disaster was to occur (medical for example).

The rate difference to me is negligible enough to not worry in the end. As calculated, the extra paid amount in interest is under $200 overall.

I think i'm making sense? :hmm:

 

[iCyborg]

How do you qualify that as fail advice. Only in America paying off debt faster = fail I guess.

It's ALWAYS better to pay off ANY debt FAST.

No, it's not always the best. Even if I had a lump sum, I would rather take a loan at 1.49%, and invest the lump sum into pretty much anything. Even bond funds have better return rates in recent years, and equity funds have been yielding 15-20% last couple years. While I don't do it, borrowing money to invest is not an uncommon thing...

 

[r83osu]

Just got the loan documents:
60 months
APR 1.490%
Finance charge: $753.88
Amount Financed: 19,648.02 (oops thought it was 19 for some reason)!
Total Payments: 20,401.90
Monthly payment: 340.04

My previous loan was:
60 months - with 49 months remaining
APR 1.24%
Finance charge: 759.86
Amount Financed: $23,467.05
Total Payments: 24,226.91
Monthly payment: 403.79

If I recall from the phone conversation, if I continued my loan, the payments would increase to 405.xx due to the slight rate increase

Just an FYI, this is for a 2014 Ford Focus ST, with the ST3 package, Moonroof,Rado-gray wheels (12k miles). I think that's why DCU placed a high value on the car, due to it being the highest optioned vehicle.

 

[uclaLabrat]

How do you qualify that as fail advice. Only in America paying off debt faster = fail I guess.

It's ALWAYS better to pay off ANY debt FAST.

Even if it saves you $100 bucks or so.

I'm not saying your advice is "fail", it's fine....low % and low interest paid anyways.

What if OP losses a job and can't pay that loan and it blows up into 30% interest during that extra 12 months he is paying......

Better safe than sorry.

That's precisely what we're saying, it's NOT always better to pay off any debt as fast as you can, which is why it's fail advice.

 

[dbcooper1]

As long as there's not a prepayment penalty, extending the loan gives you the flexibility to do either for the remaining months of the loan; situations change over a 4-5 year period for any number of reasons. Similar to having a 30 year mortgage and making the payment every month and adding extra principal; it's quite common, or used to be anyway.

 

[r83osu]

As long as there's not a prepayment penalty, extending the loan gives you the flexibility to do either for the remaining months of the loan; situations change over a 4-5 year period for any number of reasons. Similar to having a 30 year mortgage and making the payment every month and adding extra principal; it's quite common, or used to be anyway.

Yeah no prepayment penalty and I just have to do a separate auto deduct for the excess payment. So it all goes to principal.

 

[mvbighead]

Honestly, if the interest rate remains the same in either case you should ALWAYS go with the longer loan unless there is a pre-payment penalty. And as others are saying, investing is probably a wiser decision with the difference.

 

[mizzou]

strange...why switch? Aren't you going to have to pay closing costs for the 2nd loan?

Just keep paying your parents and then put the closing costs towards principal debt owed to mom&dad.

 

[Brinson]

strange...why switch? Aren't you going to have to pay closing costs for the 2nd loan?

Just keep paying your parents and then put the closing costs towards principal debt owed to mom&dad.

Mortages have closing costs...car loans don't.

 

[Dice144]

Actually some car loans do. A "finance" fee. Normally pretty low tho.

 

[SearchMaster]

Thing is, MOST people don't take the difference and invest it anywhere, it just gets spent on something else. So depending on the type of person you are, Vdub's advice may be best or everyone else's may be best.

If you are disciplined and begin putting the difference into a reasonably safe investment, you'll do pretty well after 5 years. If not, then consider this: after the 4th year, you'll have no payments so you can save your monthly payments for a year which will be nearly 5 grand, and you won't notice a difference in your lifestyle. It's similar to the tax refund issue...it's never "smart" to give the govt a tax free loan but it's also a forced savings plan for some people who wouldn't normally save otherwise.

 

[Naeeldar]

The fact of the matter is there is not enough financial information here to give good advice. If the OP has a tight monthly budget each month he may be better to free up the $80 a month just to have extra money to give him a better quality of life.

But the one piece that is accurate is it does not matter which option you choose. The net result is the same other than about $150 over next 5 years - which is nothing.

 

[nerp]

I'd do it but you have to be religious with maintenance. Make sure you don't end up in a position where you find yourself facing a major repair after the warranty expires but you still have two years left on the loan. It is never fun paying $1,200 for a repair a week before your next car payment is due. I have heard horror stories of people who bring their Escalade to the dealer with a gunked motor, just out of warranty and they still owe $30k on it. You have to be an idiot to let something like that happen, but hey, this is the internet and I can't assume anything about you.

 

[r83osu]

I'd do it but you have to be religious with maintenance. Make sure you don't end up in a position where you find yourself facing a major repair after the warranty expires but you still have two years left on the loan. It is never fun paying $1,200 for a repair a week before your next car payment is due. I have heard horror stories of people who bring their Escalade to the dealer with a gunked motor, just out of warranty and they still owe $30k on it. You have to be an idiot to let something like that happen, but hey, this is the internet and I can't assume anything about you.

Meh, the powertrain warranty is 5 years, so at most I'll be a year out of warranty and owe a small amount. Oil changes every 5k miles (not the 10k Ford recommends)

But, I have scheduled an auto payment of the minimum balance, and a separate auto payment of the excess amount to the principal. So ideally this should get paid off in the 4 year time frame.