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Long story short: My girlfriend has a 20.53% APR car loan. No one will refinance the loan because of the value of the car, roughly $5,000. Theres still 50 months left on the loan. Total left with interest is $17,701 and the early payoff amount as of today is $11,790. She currently has $15,000 in savings and an average of $1,100 surplus each month.

I suggested that she send a one time payment, ~$5,000, to get the principal down and then pay extra each month to get it done in a year. She’s hesitant about taking that much out of her savings. I need some help putting this in perspective.

How should she go about paying off this loan in 1-2 years. Which way would save the most money?

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    How is her credit now? Obviously it wasn't great when she got the loan initially. And are you sure the value of the car is really that different from the loan balance? – quid Apr 22 '17 at 19:38
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    Don't take her financial problems on as your problems. Do NOT bail her out of this situation with your own money, unless you're buying the car/title from her completely and cleanly. – Criggie Apr 22 '17 at 21:49
  • @quid her credit is great now, 770. Yes her credit was horrible when she bought the car. She didn't realize the severity of what she was doing. Pretty sure. Looked at third party prices and trade in values. It may be off by a little but not by 5k unfortunately. – 404UserNotFound Apr 23 '17 at 14:26
  • @Criggie thanks. I lurk here enough to know better lol. I'm just trying to build a silver bullet sentence that will make her see how much money she is throwing away. – 404UserNotFound Apr 23 '17 at 14:29
  • Pay it off in full immediately. That is a horrible rate on a long term loan. By your own calculations she is paying an extra 6k by paying off the loan on the current schedule. That should be enough of a reason to pay it off ASAP and she has the money in the bank to do that right now. – Evan Steinbrenner Apr 24 '17 at 22:08
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Which way would save the most money?

Paying of the car today would save the most money. Would you borrow money at 20% to put it in a savings account? That's effectively what she is doing by not paying off the car.

If it were me, I would pay off the car today, and add the car payment to my savings account each month. If the car payment is $400, that's $1,500 a month that can be saved, and the $12k will be back in 8 months.

That said - remember that this is your GIRLFRIEND, not a spouse. You are not in control (or responsible for) her finances. I would not tell her that she SHOULD do this - only explain it to her in different ways, and offer advice as to what YOU would do. Look together at how much has been paid in principal and interest so far, how much she's paying in interest each month now, and how much she'll pay for the car over the life of the loan. (I would also encourage her not to buy cars with a 72-month loan, which I'm guessing is how she got here). In the end, though, it's her decision.

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    The relationship management advice, while reasonable, feels out of place in this otherwise solid answer. – Willie Wheeler Apr 22 '17 at 18:28
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    I would keep some savings, as you can't put the loan back on the car if cash is needed quickly for some reasons. However i would have brought a cheap 2nd hand car for cash in the first place..... – Ian Apr 22 '17 at 18:46
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    @WillieWheeler Understanding what accounts you are responsible for and which ones you aren't is a critical part of financial management. How many times have you seen someone go broke to financially support someone with poor spending habits? – corsiKa Apr 23 '17 at 1:46
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    Would you borrow money at 20% to put it in a savings account? That's effectively what she is doing by not paying off the car., this is a great way to see it and the road to getting the savings back makes complete sense. Hopefully she'll see it the same way. Thanks for throwing that bit in at the end. I've kind of taken the reigns at trying to get it refinanced for her so I was starting to feel like its my car loan now. – 404UserNotFound Apr 23 '17 at 14:31
  • There is a lot of wisdom in this answer, and it was good of you not to neglect the relationship aspect. – Pete B. Apr 24 '17 at 15:12
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For a $350 monthly payment, she is currently paying $200 monthly in interest. You say that no bank will refinance her, but that is not true, I'm sure many banks are happy to refinance her to the value of the car. She should start that process. You'll find that your suggestion to pay $5000 down on the current loan is pretty similar to what she would need to bring to a bank to refinance (maybe as much as $7000 to refinance). After that she would be paying a much lower amount in interest, and she could still retire the loan a year or two (but she would be paying even less in interest). The advantage to borrowing from her emergency fund is that she retires the loan 14 months earlier.

The problem is that you are prioritizing the least amount paid, and she is prioritizing an emergency fund. Emergency funds are also very important. You might have better success if you prioritize paying back the emergency fund in your plan. If she puts $7000 down to refinance, assume a 3 year loan at 4.5% with a $150 monthly payment. Instead of paying down the remaining $5000 quickly what if she put the extra $200/month toward paying back her emergency fund? It would take the same 3 years to fully pay it back without impacting the rest of her budget at all. If she has extra room in her budget, she could pay back that emergency fund even faster.

Many of us who prioritize minimizing interest paid and maximizing interest earned already have a robust emergency fund. Your girlfriend isn't wrong to value that. Unexpected emergencies can cause much more interest to be paid if there is no way to deal with them. (That's how paycheck and title lenders capture their customers.) Talk to her about what emergencies she might need the money for, and make a plan to replenish the fund, and you're much more likely to have her buy in.

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