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YACT: Auto-Refinancing

Old 10-21-14, 11:57 PM
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YACT: Auto-Refinancing

I bought my '08 Honda Civic in October 2011. At the time, my credit was pretty crappy (old debts were paid off, but still lingering on my reports and affecting my score). My FICO was very low -- either high 500s or low 600s.

The original loan amount was about $12,500. The only bank that would finance me was Wells Fargo. It's a 72-month (6-year loan) at 9.49%. My payments average $230 a month.

It's 3 years-later. Outstanding principal left on the car is about $7000. My credit is significantly better. My score is now closer to 700 (not quite there), but all of the old shit fell off my reports except for one item:

An older car loan from when I was 19. I had a few late payments on it in 2006 (after that point everything was on time until it was paid off). The loan didn't mature until January 2011, so it's still on there. I have no idea how long it will take to fall off (I pulled my reports last month and everything was great except for this).

The only other thing is my credit-to-debt ratio. It's very high right now for some unforeseen expenses about a month ago. It'll take me a year or so to pay off my credit cards.

I've never refinanced anything before, but I'm considering it. My credit union has fair rates (although they did deny me back in 2011). The fact that I still have 3 years left is daunting because I can afford a little more per month now since I'm at a different job and if I can shave off a year by getting a lower interest rate I'd do it.

Any advice? Is it worth it given my current situation?

Also, for those wondering, the car that was paid off in 2011 was a lemon and needed repairs in excess of $3000 (the KBB at the time was $2500). So I had a total of 10 months without a car note. This made more sense for me in the long run.
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Old 10-22-14, 12:17 AM
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Re: YACT: Auto-Refinancing

Do you have a 401k plan? Your situation is pretty tough given the extreme amount of debt you have. But since you're working full time, this may be an alternative, although not recommended for everyone.

Contact your 401k plan provider about taking out a tax free loan. Let's say you're $15k in debt to your cards and car loan. Take out that amount from your 401k, they will cut you a check and you can use it to wipe out all your debt. Only thing is, you will need to pay back that money to your plan, in addition to any contributions. If you fail to pay back the 401k loan within the allotted time, you will take a 10% penalty and 20% tax hit. On the plus side, it will wipe out your debt and help your credit if you have the funds. On the downside, you have to pay it back, but it's to only one bank and its your money. It's also a temporary hit to your retirement funds.

I don't think re-financing $7k is worth it unless you're really hurting financially. At least you have a job.
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Old 10-22-14, 12:29 AM
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Re: YACT: Auto-Refinancing

Originally Posted by DJariya View Post
Do you have a 401k plan? Your situation is pretty tough given the extreme amount of debt you have. But since you're working full time, this may be an alternative, although not recommended for everyone.

Contact your 401k plan provider about taking out a tax free loan. Let's say you're $15k in debt to your cards and car loan. Take out that amount from your 401k, they will cut you a check and you can use it to wipe out all your debt. Only thing is, you will need to pay back that money to your plan, in addition to any contributions. If you fail to pay back the 401k loan within the allotted time, you will take a 10% penalty and 20% tax hit. On the plus side, it will wipe out your debt and help your credit if you have the funds. On the downside, you have to pay it back, but it's to only one bank and its your money. It's also a temporary hit to your retirement funds.

I don't think re-financing $7k is worth it unless you're really hurting financially. At least you have a job.
Yeah, I contribute to my 401k every pay period. However, I don't have nearly enough to pay off all of my debts, so it it's not an option.

I'm not sure what is considered a viable amount to refinance, but honestly the other part is I don't know how much I better I could do in terms of an interest rate. I was mainly hoping to shave some time off of the loan as a whole.
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Old 10-22-14, 02:40 AM
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Re: YACT: Auto-Refinancing

Negative stuff is supposed to drop off your credit file after 7 years. The 7 years runs from the date of your last delinquent payment, not from when the loan is paid off, so you might might want to dispute any negative entries from 2006. They should be removed and your score may improve somewhat.

To improve your credit score, I have heard that it is best to have a variety of credit account types and to stay current on all of them. In other words, have a car note, a credit card, a mortgage, etc. Each category of credit account contributes a certain percentage toward your overall credit score so it is best to have a variety of credit account types. You already have a car note, so keep current on that and maybe think about getting a new credit account, a Target Red Card or other such card, and ask for the highest credit limit possible to improve your credit to debt ratio. Do not max out this card, of course.

There are websites that advise as to this stuff in more detail. I like Credit Karma for no real reason other than I heard about them on a local radio broadcast and they seemed sincere.
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Old 10-22-14, 07:14 AM
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Re: YACT: Auto-Refinancing

I have never heard anyone who knows what their talking about financially, recommend withdrawing from a 401K. That's usually the very last thing you want to do.

My credit union has rates of 2.76% for a 2008 vehicle. It's pretty straight forward in that refi's are handled the same as new loans, I think there's a $100 fee. So in my example if you refinanced at say 3% your payment would drop from $225 to 205 for a 3 year loan. You'd recoup that $100 in 5 months and then save $20 per month for the last 2.5 years
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Old 10-22-14, 08:25 AM
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Re: YACT: Auto-Refinancing

Originally Posted by ResIpsa View Post
Negative stuff is supposed to drop off your credit file after 7 years. The 7 years runs from the date of your last delinquent payment, not from when the loan is paid off, so you might might want to dispute any negative entries from 2006. They should be removed and your score may improve somewhat.

To improve your credit score, I have heard that it is best to have a variety of credit account types and to stay current on all of them. In other words, have a car note, a credit card, a mortgage, etc. Each category of credit account contributes a certain percentage toward your overall credit score so it is best to have a variety of credit account types. You already have a car note, so keep current on that and maybe think about getting a new credit account, a Target Red Card or other such card, and ask for the highest credit limit possible to improve your credit to debt ratio. Do not max out this card, of course.

There are websites that advise as to this stuff in more detail. I like Credit Karma for no real reason other than I heard about them on a local radio broadcast and they seemed sincere.
I actually have a pretty firm grasp on my credit from cleaning it up over the past 6 or so years. I know most of the ins-and-outs, and I'm researching what I need to do to get the delinquency from my old car note removed (aside from disputing it). I appreciate the advice, though.

I guess I'll just go in to my credit union this week and talk to them. Just wasn't sure if it was worth my time.

Last edited by My Other Self; 10-22-14 at 08:45 AM.
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Old 10-22-14, 08:44 AM
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Re: YACT: Auto-Refinancing

Originally Posted by Jacoby Ellsbury View Post
I have never heard anyone who knows what their talking about financially, recommend withdrawing from a 401K. That's usually the very last thing you want to do.
Withdrawing and taking out a loan against are different. I've used 401k loans a few times over the last decade. I'd much rather take out a loan against my own money versus a bank. That being said, not everyone has their 401k plan set up so that they can do that.

I agree completely with not taking a withdrawal unless you're in a hardship situation.
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Old 10-22-14, 08:01 PM
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Re: YACT: Auto-Refinancing

Just pay off the auto loan. Refinancing it, while you would get a lower rate, really won't save you that must in interest. Lets say you drop your rate to 5%. You only save $315/year. Plus, with vehicle being 6 years old; rates will be higher than current rates and some lenders don't even finance vehicles over 5 years old. You want to save money on interest; just pay car loan off early.
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Old 10-22-14, 08:18 PM
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Re: YACT: Auto-Refinancing

Originally Posted by tbone View Post
Just pay off the auto loan. Refinancing it, while you would get a lower rate, really won't save you that must in interest. Lets say you drop your rate to 5%. You only save $315/year. Plus, with vehicle being 6 years old; rates will be higher than current rates and some lenders don't even finance vehicles over 5 years old. You want to save money on interest; just pay car loan off early.
I don't want to pry into his finances, but it doesn't sound like he has enough cash to pay it off.

I've had 2 auto loans in my lifetime. Both were for new cars. I paid off the first loan entirely with a $4k balance left with cash I had saved. It sucked to lose that cash, but I was glad to get rid of the outstanding debt. The second car loan I had was for my current 2012 KIA Sorento. I put a $13K down payment on a $20K car and financed about $7K for 5 years. I knew off the bat I wasn't going to drag out that small amount for 5 years. I paid the balance off in full with my income and savings within 5 months. I don't have a super amount of cash and savings right now, but at least my car is paid off and I have very little outstanding debt.

If he has any cash or savings, I can see it being hard to part with it if some unforeseen expense comes along, then he'll be broke, even though the car is paid off.
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Old 10-23-14, 08:12 AM
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Re: YACT: Auto-Refinancing

A 08 Honda probably isn't worth $7000 and credit unions are sticklers about not loaning more than the car is worth on a used car.
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Old 10-23-14, 08:48 AM
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Re: YACT: Auto-Refinancing

Originally Posted by Noonan View Post
Withdrawing and taking out a loan against are different. I've used 401k loans a few times over the last decade. I'd much rather take out a loan against my own money versus a bank. That being said, not everyone has their 401k plan set up so that they can do that.

I agree completely with not taking a withdrawal unless you're in a hardship situation.
Even a loan is usually a bad idea from what I've heard. Here's a good article about it... http://www.investopedia.com/articles...easons401k.asp The bottom line is you are opening yourself up to greater risk in the short term (being "trapped" in the current situation and/or potentially "defaulting" on the loan) as well as the long term (w/ the money being gone from the investment you are not getting the most value out of growth/compounding). If someone is doing this on a regular basis I think I would recommend looking more at setting up a good budget and trying to live within that before looking at 401k loans. JMO...

Edit: Here's another good article about this, gives the good/bad points... http://www.forbes.com/sites/learnves...rom-your-401k/

Last edited by nemein; 10-23-14 at 09:01 AM.
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Old 10-23-14, 09:16 AM
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Re: YACT: Auto-Refinancing

I agree with a lot of the points made there. Thankfully, not many apply to me. I'm able to still contribute and never reduce my contribution amount when a loan is out. I also have been putting a good amount away (10-12%) in 401k since I was 19 so I have a decent savings even when a loan is out. The one I really agree with is that it locks you into a situation. I'm not thrilled with my job and having a loan out means I need to stick with it at least until it's paid off.

I never take large amounts. A few thousand here or there when unplanned repairs/purchases are needed is about it. IMO, I'd rather do a loan and pay it off asap (not sure if all allow early payoff but mine does) rather than paying a bank a few months worth of interest.
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Old 10-23-14, 09:31 AM
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Re: YACT: Auto-Refinancing

Originally Posted by Timber View Post
A 08 Honda probably isn't worth $7000 and credit unions are sticklers about not loaning more than the car is worth on a used car.
The car is pretty immaculate. KBB is about $7800, though I honestly had no idea it would have depreciated as much as it has in 3 years.

My last car was worthless by the time it was paid off, though. This will hold its value a lot longer than that one did.
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Old 10-23-14, 01:26 PM
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Re: YACT: Auto-Refinancing

getting quotes for a loan is free. can't hurt to look into it. and the math is pretty simple, you know how much you'll be paying over the current loan, so compare that to the new loan.
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Old 10-23-14, 01:42 PM
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Re: YACT: Auto-Refinancing

If you can reduce your payment and/or shorten the term without increasing your payment too much, it's worth a look. Sounds like you're not in a position to just pay more on your existing loan to get it over with quicker and pay less interest, so this may be the next best thing. 6 years is just too long to pay even on a new car IMO, but I realize sometimes you don't have much of a choice.
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