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I recently moved into a new place/city and am looking to free up some room in my monthly budget. For the first time in about 3-5 years, I shopped for new car insurance and then looked into an auto loan refinance.

My current loan is 60 months at 4.75%. I got approved for a much better monthly payment through my bank (BoA) that would cut my monthly payment in half basically, but the interest rate is 0.94% higher than my current loan. I thought it was a little odd since my credit has improved since then. I saw what it pulled at and I know that it's higher than what I initially applied with at the dealership.

I selected the 60-month option but am eager to see what the payment/rate would be at 48 months. I know that going the refinance route means I'll end up paying more interest especially if the APR is higher. I'm estimating that I probably have around 28-30 months left on my current loan based on my payoff amount.

I'm interested in knowing if I'm missing something and if this could end up saving me money or if I'll just unnecessarily spend more in the long run. It will be nice to have a bit more in my monthly budget now, so that is worth considering.

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    Maybe I'm just having a case of the Fridays, but am I correct in understanding that you're considering refinancing a loan that has 30 months left on it with a new 60-month loan? That would definitely explain why the payment is "cut in half" - you're doubling the duration of the remaining loan. Again, maybe I'm misunderstanding. – BobbyScon Mar 12 at 21:36
  • No, you're understanding it correctly. The initial loan amount was 20k and there's 9k left on it. I'm having a case of the Fridays as well for asking this question. I will just end up paying slightly more in the long run due to the slightly higher APR, right? – Timothy Fisher Mar 12 at 21:39
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    Well the total interest you'd pay on a 9K loan for 30 months at 4.75% is around $563. If you change that to 60 months at 5.69% then you'd pay around $1,362 in interest i.e. more than twice as much. – Robert Longson Mar 12 at 21:53
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    Consider shopping around more. Credit unions often have low car loan rates. PenFed is advertising 3.74% for a 60 month refinance here: penfed.org/auto/refinance – Orange Coast- reinstate Monica Mar 13 at 17:16
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Strictly looking at the loan numbers:

  • Your original loan was $20,000 at 4.75% for 60 months. That equates to a monthly payment of around $375. You'll pay a total of $2,508 in interest over those 60 months.
  • You have $9,000 left, which means about 26 payments remain. You've paid about $2,000 in interest so far.
  • If you refinance that $9,000 into a 60-month loan at 5.69% (4.75 + 0.94), your monthly payments drop to around $173 and you'll pay $1,362 in interest. This means you'll have paid an extra $854 in interest total.
  • Your $20,000 car now cost you $23,360+.

Factors to consider:

  • Your car is now 3+ years old. It's depreciated, meaning it's not worth what you originally paid for it.
  • If you choose/need to sell the car, and it's worth less than you have remaining on the loan, are you going to be able to cover the outstanding balance?
  • Having an outstanding lien on a vehicle means you have to have more expensive insurance for it. If you paid off the loan in 2 years, you could find some pretty big savings in insurance, dependent on the value of the car and what coverage is required where you live.

One of your concerns was not understanding why the interest rate was higher for the refinance than when you originally purchase. Simply put, interest rates vary over time and having a better credit score now doesn't account for how those rates have changed in the 3 years since you purchased. Anecdotally, I've never found Bank of America rates to be very competitive. You should check with local credit unions if you're set on refinancing. It's also quite likely that the banks' refinance rates (for cars) is reflective of the fact that the collateral is depreciating and the income isn't worth competing for.

Is it ever worth it?

In my opinion, no. You're just putting more money into an asset that won't be worth what you put in.

One argument might be if you have no emergency fund. I'm not making any assumptions about your personal financial situation, but considering how many people don't have emergency funds I think this is worth mentioning in case others find this post. Reducing the monthly expenditures and strictly putting the payment difference into a savings account until you have enough to cover basic living expenses could be a smart move. Once you have the emergency fund in place, then go back to paying off that car loan as fast as you can. However, if your car is currently worth $11,000 or more, I'd vote that you sell the car, take the $2,000 from the sale and buy a well-loved vehicle, save a bunch of money on insurance and get rid of the monthly payment altogether. Then you can put all of that savings into an emergency fund.

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  • This was a really good breakdown and helped me understand everything, thank you! – Timothy Fisher Mar 12 at 22:30
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    Really you should ignore the car. You have it to use in either scenario. It is just there to convince the lender they will get paid. Your real choices are to pay the 9000 back in 30 or 60 months at the stated payments. You are borrowing the difference in payments every month for the next 30, then paying that back with the full payment for the 30 months after that. Is money in the next couple years worth the extra interest? Only you can say. HIgher insurance with a loan only makes it worse. I haven't shopped enough to know whether that is true. – Ross Millikan Mar 13 at 6:02
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    And don't buy a $20000 car! – user253751 Mar 13 at 10:48
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I am answering the question in the title:

Is it ever worth it to refinance an auto loan for a higher APR?

The way you lower the monthly payment is be either:

  • extending the loan
  • getting a loan with a lower rate.

Some people will extend the loan thereby cutting the monthly required payment, they will also get a lower interest rate reducing the monthly interest they will pay; but then pay old payment level so they save even more when they pay it off even quicker than the old loan due date.

But if you aren't getting a batter rate when you extend the loan period, then you will pay more money in total. In your case you are paying a higher interest rate and getting a longer period, which means that the lower monthly payment is masking what it is costing you in the end.

So when would somebody do this?

A time this makes sense is if that lower monthly payment is the only thing that matters. If your circumstances have changed significantly, and your family income has dropped and will remain at that lower level for the foreseeable future, or if your family expenses have rapidly increased and will have to stay at that level for the foreseeable future; then the lower monthly amount is the most important thing. This can occur when there are job losses, or medical issues that will either limit income, or increase expenses.

In that case the change in loan rate and loan period is done with the entire financial situation in mind.

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  • Your last two paragraphs essentially extend on why it's worthwhile to take out a loan in the first place. You pay more in the long run because of interest, but it allows you to buy something you can't afford outright. It's a tradeoff between total cost and cash on hand. – Barmar Mar 13 at 16:40

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