Wednesday, October 8, 2014

Refinancing Car Loans? Uh, No.

Refinancing a car loan is a sure sign you are on your way to Hillbilly Financing!

In the e-mail this morning, this missive from Capital One.  Capitol One can be a good bank to deal with, as they have low interest rate (7.17%) credit cards and no foreign (overseas) transaction fees.   But like all banks, they will also hand you a loaded pistol and let you play Russian Roulette if you want to.  You don't want to, trust me.

The gag is this:  Refinance your car loan, usually over a longer term, and the bank makes more money in loan fees and interest.  You lower your monthly payment by a trivial amount, but end up behind the 8-ball in the long run.

The pitch was this:

Refinance and you could lower your payments by $737 per year on average.*

"*Yearly payment reduction claim is based on estimated average payment reduction our customers experience over a year with their new loan (same or a longer term) compared to their prior yearly loan payments. Yearly payment reduction may result from a lower interest rate, a longer term or both. Your actual savings may be different."

$737 sounds like a lot of savings!  But that is not "savings" but just lowering your monthly payment by about $60 a month.   Lower payments does not always mean "Savings!" but rather something else.  In this case, it means a longer loan term, and that means you are not "saving!" but rather paying more in the long run.

And since loan rates haven't been going down lately, I doubt many people qualify for a "lower rate" particularly on a five-year-old used car.  Longer term is the gag they are selling

And as I noted in my seven-year car loan posting, long-term car loans are dangerous.  You can end up "upside down" on a loan in a real hurry, and moreover, the car will wear out before you pay off the loan.   Suddenly, you need new tires, a brake job, and a bunch of other things, and you now still owe for three more years.

Freaking Brilliant Financial Move!

If you can't afford a car loan, you can't afford the car.   What gets people into trouble like this is that they buy more car than they can afford, and then can't afford the payments.   A better idea is to buy a cheaper car (preferably used) and pay less (preferably cash) and finance less (preferably not at all).

But of course, no one in America wants to do that do they?  No, Americans by and large like to buy more than they can afford, put themselves into debt up to their eyeballs, and then blame it all on Obama (or the Republicans) when their lives go horribly wrong.

And folks like Elizabeth Warren would say that such deals are rotten and we should pass laws to make them illegal.   And there is logic in that, but it ain't gonna happen in my lifetime, so let's move on to plan B - not taking bad deals, just because they are offered.

We could outlaw smoking (or drinking) as those are also bad for you.   But we've tried that and it largely didn't work - it drove the business underground.   Loan sharking is nothing more than bootleg lending, when you think about it - and the end result of outlawing poor financial choices.   But I digress.

If you are thinking of refinancing your car loan to save $60 a month, and at the same time paying $100 a month for cable TeeVee, I have a suggestion for you:  Dump the cable and use that money to pay down the car loan.  Sacrifice something.  Do without.   In the long run, you will be better off.

Biting on these bad financial deals isn't the answer.