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Refinancing

A question to those who live in US.

What is your experience with refinancing?

Is it worth it? 

When to do it?  what to consider and pay attention to?

Thank you!❤

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You should direct this to an accountant? I'm not one, but the basics.

Overall, the cost of a mortgage is the principle (what you paid) plus the finance charge (money the bank makes for loaning you the principle which in turn helps to pays their bills and to pays the source the bank used for loaning you the money). So if you refinance, you're probably looking to reduce the finance charge;  by shortening the length of the loan or the amount charged. There may be other considerations too. Terms of the loan. Local laws. Affect on other finances that may be tied to it. 

Somebody with both financial and law experience(real estate) might work out or foresee hurdles  and pitfalls.

 

 

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Thank you for your reply @BeyondTheRim

To be more specific, I was looking into possibility of refinancing the car. The monthly payment I can deal and don't mind being aggressive with it. It's the insurance that drives me crazy.

I have dealership financing, so I went into my account and requested a pay off quote as if I want to pay it off right now. I was shocked to see that it turns out to be the same amount left + 20$. For some reason, I was under impression that if I pay off early, the remaining principle should be taken off.

Then I requested refinancing quote. Nothing.

My guess is that the car was already purchased at a ridiculously low rate 1.99-2.25% (i don't remember the exact number) and they can't go any lower than that.

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Cut and Paste Article from ( www. moneyunder30.com/pay-off-your-car-loan-early)

Why It’s So Hard To Pay Off Your Car Loan Early (And How To Do It Anyway)

By Kevin Mercadante  • July 18, 2017

You want to pay off your car loan early. But auto lenders make it extremely difficult to make principal-only payments. Here’s what to do.

With most loans, if you pay them off sooner than planned, you pay less in interest (assuming it has no prepayment penalties). But that may not be true for your car loan. Some lenders have language in their contracts that actually prevents you from paying down the principal earlier than planned. Here we’ll go over what you need to know before you try to pay off your car loan early.

Why do lenders make it difficult to pay off your car loan early? Put simply, it’s because those lenders want to make money, and paying down the principal early deprives them of interest payments.

How car loans calculate interest

Most loans (for example, a mortgage or a student loan) charge compound interest. Many car loans, however, compute interest differently—they charge simple interest.

What’s the difference between compound interest and simple interest?

Compound interest is charged on both the principal and accrued interest amount. That means that as your interest balance increases with each day that the loan is outstanding, interest is also charged on that balance.

Simple interest is calculated based only on the principal balance outstanding on the loan.
The good news is that simple interest results in a lower interest charge over the life of the loan. In fact, the simple interest calculation can save several hundred dollars over the full term of the loan.

Related: Car Affordability Calculator

Precomputed interest on a car loan

Car lenders also sometimes use something called precomputed interest. Lenders use your original payment schedule (i.e. how long you’ll take to pay off the loan) to calculate the total interest on the loan, and that total interest is set.

Even if you pay your loan off sooner, or make extra payments, the amount of total interest you pay does not change.

The amount of interest you pay using precomputed interest will be the same as it is for simple interest if you make all your payments according to the schedule. If you make additional principal-only payments under this type of loan, the lender may first apply the extra payment to the interest balance precomputed over the life of the loan, rather than to the principal balance.

When you want to make principal-only payments, you must contact the lender and determine what the process is.

If the lender is not accommodating, then you may have to consider refinancing. If you refinance the loan, verify that the new lender uses either compound interest or simple interest. And specifically avoid those lenders that use pre-calculated interest.

As a general rule, banks and credit unions ten to use compound interest. But auto loan finance companies will be more likely to use precomputed interest, or simple interest.

Setting up extra principal payments on a car loan

Some car lenders will not accept principal only payments.

For instance, Ally Bank says so explicitly.

If you use the Ally payment calculator, and set it up for extra payments every month, it shows you’ll pay less in overall finance charges. There’s even a video that says the same.

So what’s the deal? In the way of banks, Ally is being exceptionally cagey about how its loan actually works. You can pay it off early, and you can save in interest. But Ally will never take a payment and automatically apply it to the principal. It will first take care of any other outstanding charges, including interest.

When you pay your car loan, you’re paying both part of the principal and also any interest that has accrued in the time since your last payment. So, if you make your regular payment as usual, then two weeks later get an unexpected windfall and want to throw that at your balance, Ally will first put it toward the two weeks of interest that’s accrued since your last official payment. Then, whatever’s left over will apply to your principal.

Once you’ve made an extra payment, the bank will simply reduce the amount of your next payment, possibly to zero. Or they’ll change the date your next payment is due, instead of simply applying amount to the balance and charging you the next month as usual.

The temptation here, of course, is to look at that minimum due ($0!) and simply not pay for the next month, or the next two or three months, until that minimum is back up, which means eventually your payment schedule will return to normal. You won’t pay your loan off early; you’ll just have made payments ahead of schedule, and then taken a brief hiatus from paying.

If your lender won’t accept principal-only payments

If your lender will not accept principal only payments, you have two choices:

Refinance the loan with a lender who will accept principal-only payments. Make sure that you get written verification before doing the refinance. You can get no-obligation auto loan refinancing quotes from LendingTree online in about five minutes.

Make your additional principal payments to a dedicated savings account, and when the savings account balance is high enough, pay off the loan completely.

But before you do any of that, check to see what the laws are in your state in regard to principal-only car-loan payments. If your lender doesn’t allow it, but state law does, you can cite the law and require that they make a provision to accept the payments.

Related: Peer-to-Peer Auto Loans

Other banks make principal-only payments difficult

To maximize the amount of interest you pay, lenders make you jump through hoops to make additional principal payments. For example, some may require that you write a separate check—in addition to the regular monthly car payment—for principal. Some banks even require that additional principal payments be sent to a completely different address.

In 2010, Consumerist reported that Chase Bank required you to send a paper check to a specific address for the payment to be applied to the principal. Otherwise, they simply considered additional payments to be early payments, rather than truly an “extra” payment. It seems they’ve since changed their ways. According to this document, from 2014, you can now simply check a box marked “principal reduction”. There are also instructions on the payment coupon, if you pay by paper check.

Summary

As you can see, car loans aren’t quite as simple as they seem. Though it may seem counterintuitive, not all car loan lenders want you to pay off your loan ahead of schedule. After all, if you do, they will lose the income that they would earn on the payments that you make. For that reason, you can expect an obstacle or two to discourage you from making principal only payments.

The next time you buy a car and need to take a car loan, pay close attention to the interest calculation method. If it will be anything other than simple interest, or compound interest, look for a different loan or lender.

Further reading ....

Sounds like some companies can get sneaky:

I like this one if I were giving a loan. Did you have this in the contract:

Prepayment Clause

Car loans and mortgages may contain a prepayment clause. In some cases, the clause stipulates that the lender receives all of the interest you would owe if you didn't make a large, extra payment on the loan, even if you do make an additional payment. For example, if you make a payment of $200 extra, the lender may hold that $200 until the next month, and then apply it to the interest that has accrued, and then apply the remainder to the principal. Review all the loan paperwork closely before you sign to make sure a prepayment clause or pre-computed clause is not in there.

Loan I had tried to entice you to take a payment vacation for a couple of months each year with no penalty. Loan from a decent bank, but never felt quite right and didn't take advantage of that offer as I wanted to pay off early and this would have extended the time it would taken to pay the loan. I suspect they may have had some benefit from having the loan on the books a little longer.

Just another link of paying off early:

https://www.payoff.com/life/money/6-ways-to-pay-off-your-car-loan-early/

I had forgotten why I like compound interest after being reminded of simple interest. It grows more rapidly.

 

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