Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

11/23/2004
Whether refinancing her car improved her financial situation.
I am wondering what is the best thing I can do about my vehicle I am currently financing right now? It is a 2003 Pontiac Sunfire with 38,578 miles on it. When I originally got it the interest rate was 17.95%, which I did not understand very good at the beginning. I just signed on to another lien holder at 16.4% and another five years. I did this to make my payments lower, but now I am wondering if I did the right thing. It seems to me that this car is not worth nearly the $13,300 this second finance company is buying from the first company. What should I have done? and What should I be doing now? Paying more than the minimum??? My first payments were $405.89 and now the second finance company says I will pay $329.00 a month for 60 months....
Gail V. Marquet:
expert info »
Refinancing the car was a good idea, but extending it for another 5 years was probably not. You are going to find yourself owing more than the car is worth very shortly if not already. My suggestion would be to pay any extra each month you can on the principal to pay the car off more quickly. You might also check with a local credit union to see if they have any plans which would allow you to refinance at a much lower rate.
Christina Gears:
expert info »
Before you start paying extra, find out if that is allowed by your contract. Does this lower the interest that you will pay off is it spread out unevenly? All contracts are different. In the future, always purchase a car from the dealer that is already a year old. It will be considerably less. And, it has the same warranty as a new model. Then join a Credit Union they usually have the lowest interest rates.
Bret Duvall:
expert info »
My recommendation to you is to shop as many banks/credit unions as possible. Credit unions are offering rates as low as 4% on auto loans. This of course depends on your credit history. You really need to get out of that 10%+ range, that is just paying too much interest. It is always better to pay more towards your loan if you can. This will lower your interest costs in the long run, plus pay it off sooner.

Bottom line, get out of the 16% loan if at all possible.
Frank Wells:
expert info »
Credit unions are financing used cars around 5.5 to 6%, and it only takes $5 to open a credit union account.

Good Luck,
Gary Silverman, CFP:
expert info »
I'm going to have to make some assumptions in answering this question. It sounds like you don't have the greatest credit. 17.05% and 16.4% loans, even on a used car, is a bit high--but common for someone with a poor credit history.

My guess is that you have an overall budget problem, not just a problem with this car loan. With that said, here are some thoughts.

While common, five years is a long time to pay on a car. Have you calculated the amount of interest you will be paying over the next 60 months? If you needed to lower your payments, I understand. But could you have refinanced for the amount of time remaining on your original loan. That way your car would have been paid off just as quickly and with less interest along the way.

Any time you have a high-interest loan, you should aggressively attempt to pay it down. There are some first steps though. You want to make sure that there are no prepayment penalties. You want to make sure that you keep an emergency fund. You want to make sure that you aren't using money to pay down the loan that you'll need for next month's insurance payment. That said, if practicable, start paying off this car.

When the car is paid off, don't stop. Start saving for your next one. And don't buy it until between your cash and your trade-in you can buy it without financing. That might mean that you'll still be driving the Sunfire in 2010, so take care of it.
Connie K. Marmet:
expert info »
The best thing to do is to explore refinancing the entire loan. The interest rate you are paying indicates that you may have some issues with your credit. Ask the institution that did the recent financing for a copy of your credit report. Sometimes there are errors on the reports that you can clear up and then seek new financing at a lower rate. As an example, an old credit card that you cancelled but is still showing as active with a $5000 line of credit and a zero balance. Having a $5000 line counts as outstanding debt when doing credit scoring, even if you have a zero balance. It's important that you do this as soon as possible. As the depreciated value of your cars gets lower, it becomes more difficult, if not impossible, to refinance.
Wallace Duke:
expert info »
Dear Car Refinanced?
At this point your best bet is to pay off the loan as quickly as possible. Use the difference between the new loan payment and the old loan payment of $76.00 to pay off the loan faster than the 60 months. With each payment you make, write a separate check for $76.00 to the finance company and specify that amount to go towards the principal on the loan. This will cut many months off the loan and will save you a tremendous amount of interest as well.
Delores Lenzy - Jones, CPA, CIA:
expert info »
Since you have now entered into the second financing arrangement, its probably not best to rehash this arrangement. In general, before financing a car shop around for the best interest rates. Depending on the age and mileage of the car, you can receive some very good interest rates. Also, go out to the internet perform a search of car interest rates.
 

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