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Sep 30 2017

Car-loan refinance can save money; beware cash-out #government #debt #consolidation #loans

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Car-loan refinance can save money; beware cash-out

Most people know you can refinance a mortgage. Fewer know you can also refinance a car loan.

As with home loans, refinancing an auto loan can save you money or put you at risk, depending on how and why you do it.

If you are struggling to make payments, you might be able to lower them by refinancing your existing balance into a longer-term loan. But unless you dramatically reduce your rate, you will pay more interest in the long run. If you want to raise cash by tapping the equity in your car, some lenders will let you refinance your loan into an even bigger one and give you the difference.

Cars vs. houses

Yes, this is the same cash-out refi strategy that got many homeowners in trouble. When the value of their homes fell, they were upside down, or owed more than the home was worth. This made it hard or impossible to refinance into a cheaper mortgage when interest rates fell. Those who couldn’t make their payments or get a modification lost their homes. Doing a cash-out refi with a car is even more questionable. Interest on a home mortgage is generally tax deductible, up to a point. Interest on a car loan is not.

Upside-down homeowners could get right-side up if home prices improve. But with very few exceptions, cars depreciate. You could end up owing more than your car is worth if you start with a high loan-to-value ratio and it depreciates faster than you can pay the loan off.

“Longer term, house prices go up. But car prices go down very quickly. If you took cash out, a year from now you could have negative equity in your car. If you lose your job or your spouse dies, you would have to pay to get out of the car,” says Philip Reed. senior consumer advice editor at Edmunds.com .

You would also be in trouble if the car was stolen or totaled in an accident, says Greg McBride. senior financial analyst with Bankrate.com. The insurance company would not pay you more than the car is worth.

Starting upside down

A few banks, including Wells Fargo, will let you borrow more than your car is worth, putting you in a negative equity position from day one.

Bob Hurzeler, head of Wells Fargo’s direct-to-consumer auto finance division, says the bank will lend up to 152 percent of the car’s wholesale value, although very few customers will qualify for the maximum.

“We look at your payment-to-income (ratio), debt-to-income, your car, your credit history, but mostly the ability to pay,” he says.

On its website, Wells suggests using cash from a vehicle refinancing for uses such as “holiday expenses” and “summer landscaping.”

Hurzeler says some customers do cash-out refis because they want to consolidate an auto loan with credit card or other debt. The auto loan has a fixed rate and term so it’s sure to be paid off, whereas the other debt might have variable rates.

“If it doesn’t benefit the customer, we are not doing it,” Hurzeler says.

Borrowers who refinance their car loan will generally need a higher credit score and pay a higher rate if they want to take cash out. The average FICO score on cash-out refis was 697 last month, Hurzeler says.

Chris Kukla. a senior counsel with the Center for Responsible Lending. says a cash-out auto refi “is not the best option,” but it might be better than taking an advance on a credit card or a high-cost consumer loan. But borrowing more than your car is worth “is a recipe for disaster.”

In most states, if you miss a payment, lenders don’t have to wait long to repossess your car and can still come after you for the unpaid balance. In California, the legal owner can repossess your vehicle at any time after the first day you miss a payment, although your contract might entitle you to grace-period or other protections, according to the California Department of Consumer Affairs .

Having a car repossessed clobbers your credit score. “It’s in the same ballpark as a foreclosure, although probably not as severe because the balance not paid is smaller,” says FICO spokesman Craig Watts. He estimates repossession could knock 80 to 100 points off your FICO score.

When it makes sense

Consumer advocates agree that refinancing your existing balance for the time remaining on your loan is a good move if you can substantially reduce your interest rate.

This might be possible if rates have dropped since you took out the loan, if you got talked into a high-rate loan when you bought the car, or if your credit score has improved a lot.

Craig Weiss of Applegate (Placer County) recently refinanced two used-car loans totaling $35,000. The old ones were at 12 and 15 percent. The new ones, from a local credit union, were at 4.2 and 4.3 percent, saving him almost $150 a month.

Weiss got his new loans, indirectly, through MoneyAisle.com. At this site, consumers can request a loan or savings product and participating banks and credit unions bid for their business in a live auction. Consumers are presented with the best rate and follow a link to apply for the loan or product.

Mukesh Chatter. chief executive of Moneyaisle.com, says few, if any, of the 135 lenders on his site will do cash-out auto refis.

Consumers can also compare rates at sites such as www.bankrate.com/auto or call individual lenders.

McBride says consumers should “shop around, watch out for up-front costs, deal with someone reputable, and don’t stretch the term.”





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