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THE SCENARIO

A few years ago I bought a new car (well, it’s a used car, but it was new to me). The initial financing terms were not super-great, but the loan was easy to get as part of the purchase. Because I was confident in my ability to refinance after the fact, I took out that initial loan.

That original loan had 60 monthly payments of $236.

I then proceeded to shop around for a better car loan, and found one with a much better interest rate.

The loan I could refinance into had 60 monthly payments of $206.

Assuming I wanted to make 15% on my money, and assuming that I was able to refinance within the first month of the original loan (making the time period covered by the two loans the same), what’s the most I could pay to do the refinance?


THE SOLUTION

This one is fairly straightforward, but some readers may be thrown by the fact that I told you nearly nothing about the two loans in question. The good news is that to find the answer, you don’t have to know how much I borrowed (on either loan – the amounts might not be the same) or the interest rates on either loan. Why? The question is about the differences between the two loans, not about the loans themselves.

Since the second loan is $206 per month, and the original loan was $236 per month, if I do the refinance, I’m saving $236 – $206 = $30 per month over the life of the loan.

First things first, make sure the calculator is using 12 Payments per Year.
N: 60 (I’m saving money each month for 60 months)
I/YR: 15 (I want to make 15% on my refinancing costs)
PV: (This is what I’m trying to find)
PMT: 30 (I’m saving $30 per month over the life of the loan)
FV: 0 (When the loan is paid off, the savings ends… but at that point I won’t have a car payment anymore, so I’ll be even better off)

The answer to the question is the most I could pay to do the refinance would be $1,261.04.

I actually paid more for the refinance than the target amount ($1,261.04), but I was able to roll the costs into the refinanced balance, so I didn’t have to pay anything out-of-pocket. I was able to do this by dropping the interest rate enough that the savings still came out to $30 per month.

The only risk there was that my new balance might be more than the car was worth, but part of the refinance cost was the purchase of a ‘Gap Insurance’ policy, which covers the difference in case my car is totaled and my auto insurance pays out less than I owe on the loan.

What do you think? Would you do this kind of refinance? Could you do one right now?
Let us know in the comments!

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Money Blog – Refinancing my car
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2 thoughts on “Money Blog – Refinancing my car

  • August 26, 2017 at 5:09 pm
    Permalink

    I tend to purchase either used cars with cash or to lease new vehicles.

    In the case of the lease, we leased a 2016 VW Tiguan for $250/month with 2k down. The sticker price of the vehicle was $34k. Our purchase price at the end of the three year lease will be 16k.

    Now, with the years of payments, the cost will be 11k–9k payments and 2k down–and here’s the kicker: We get credit for using less than the 10k mileage allowance per year. As I work from home and my wife drives to the park and ride near our house and takes the bus using the free pass provided by her employer, in 18 months we’ve only driven 5 thousand miles. We may use a total of 12k miles over the life of the lease and this brings a singinficant increase in resale value.

    Assuming the car is worth 20k at resale value, if we decide to purchase at the end of the lease, it will have cost us around 24k–after mileage discount–for a vehicle worth 34k, a savings of over the 10k for the vehicle, not counting what we would have paid in interest.

    Reply
    • August 27, 2017 at 6:21 pm
      Permalink

      Very cool! It sounds like you’ve got a good system going there. For myself, I shopped around for several months, bidding on a couple dozen cars on eBay from all around the country, all at 30% off retail or better. Needless to say, I didn’t win any of those auctions (didn’t even get to the reserve price), but on one of them, the seller was a dealership and after the auction failed to close, they contacted me and we worked out a deal. It was weird buying a car from Texas over the Internet and having it shipped to California, but doing that, I managed to buy a $13k car for right around $10k (including tax and shipping), with less than $1k down.

      I don’t mind borrowing money at low rates, particularly over sort terms – my $206 payment is less than $30 in interest and more than $175 in principal pay-down each month.

      Reply

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