Will an auto refinance help bring down the payoff for Mom & Dad?

August 4, 2008 12:13 PM

If a family member is paying off my high-interest auto loan, will it help them if I refinance that loan in advance?

(My apologies if this question seems stupid to those more knowledgeable of loans and credit than I...this really is new stuff to me.)

My parents are, quite generously, "trading" cars with me -- giving me their (paid off) vehicle and taking mine, with the intention of paying off my loan. Payoff on my car is about $13K, and I have probably 3.5 years left of payments at a whopping 14% interest rate.

Right before my parents made me this offer, I applied with my car insurance company (USAA) for an auto refinancing loan and just received notice of approval for a 6.5% interest rate.

I believe my parents' intention is to make my car payment for a few months, and then pay the vehicle off in full. My mom said I shouldn't go through with the auto refinancing loan because that would extend the loan period, which doesn't make sense since they'll be repaying the loan shortly.

This doesn't sound quite right to me. If USAA pays off the loan and extends me (or my parents, by proxy) a lower interest rate, won't there still be less total for my parents to pay off, either immediately or in the next 5-6 months? If I can do something small to help my parents out, I'd really like to.

posted by justonegirl to work & money (8 comments total)

The refi charge, plus all the work to refi, is likely more expensive than the interest differential for those couple months.
posted by notsnot at 12:19 PM on August 4, 2008

Plus, depending on how the loan is structured, they might not be permitted to simply pay the whole thing off in a lump sum without penalty. Depending on how the loan is structured, you might be paying more or less of the interest up front, as well, which could affect how much effect their monthly payments will have on bringing down the principal owed.
posted by jacquilynne at 12:29 PM on August 4, 2008

If they're going to pay off the entire loan right away, then it's not going to matter. And, as notsnot points out, the fees and such will actually add to the total capital.

Refinancing a loan never actually changes the amount you owe, it only adjusts the interest rate.
posted by Citrus at 12:29 PM on August 4, 2008

notsnot is right.

Even if there were no charges, the difference between interest on 13k at 14% and 13k and 4% isn't enough to bother with for a few months.

Also, you might take a credit hit of you do something like this. A refi can be seen as bad. Paying off right after one might be seen as bad as well.

I wouldn't bother.
posted by cjorgensen at 12:29 PM on August 4, 2008

Agreeing with notsnop, just let your parents make those few payments and then pay it off. The interest at 14% for 2 months is $303. The interest at 6.5% is $141. So if the refi charge is more than $162, it's not worth it.
posted by beagle at 12:30 PM on August 4, 2008

If your mom said not to do the refinance, then don't do the refinance. They're already taking on your financial burden; don't add to their paperwork burden as well. If this way is less of a hassle for them - even if it costs them a little more - it's their choice to make.
posted by boomchicka at 12:37 PM on August 4, 2008

Also - now that you'll have no car payment, start putting that extra money into savings each month rather than blowing it. The best way to help your parents out is to show that you're learning from their generosity, not taking advantage of it.
posted by boomchicka at 12:39 PM on August 4, 2008

Thanks, all, for the information.

FWIW, there are reasons other than simple irresponsibility for one's family members to help them out. I only mention it because, while I know the general savings-related advice was well-intentioned, it isn't really applicable here. I know there wasn't necessarily anything in the question to make that clear, but then again, the question was just about whether a refi would be beneficial in this particular situation, not about the larger financial picture.

Thanks again.
posted by justonegirl at 12:47 PM on August 4, 2008