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QUESTION: Hello Finance Guy, I have a 2012 Honda civic I purchased new in August of '12. My APR is 6.8%.  My credit has improved greatly and now I have been considering refinancing the auto loan to cut down the interest percentage. I was just approved for a refinancing loan at 3.9%. However, the loan will add an additional 5 months of payments (going from 55 months to 60 months). I don't need the reduced monthly payments, however, I do want to reduce the interest (new payment will go from $300 to $230 monthly). I believe, that if I continue paying the $300 a month, this will in turn be applied to the principal of the car and will eventually be payed off faster. Is this a good move,  or should I hold off until my credit score is even better and then re-apply?

ANSWER: You did not really provide enough detail for me to do a complete analysis of your loan, but let's take it at face value:

if your current loan has 55 months to go, at 6.8% interest, a pmt of $300 gives you a current balance of $14,236.05.

If that balance is refinanced at 3.9% for 60 months, that payment is $261.00.

On your original loan, you will be paying $2,373.49 in interest.

If you refinance it, you will end up paying $2,410.05.

If this is not your balance, please let me know and I will recalculate it.


---------- FOLLOW-UP ----------

QUESTION: Thanks for the advice. The actual loan amount is for $12,410 per Honda financial. My payments per month is around $280,however, I pay $300. That's at the 6.8% amount.

The credit union amount is for the $12,410 at the 3.29%(sorry,i thought they said 3.9%). So the way I figured it, that's over half the interest of the current loan. My payments drop from $280 to $230 monthly.

I'm not sure if the savings is worth the switch, however, the numbers seem as though they do. But then again, I am not an expert in this and am afraid of making a bad decision.

Once again, thank you for your time.
Sincerely, Jared C.

Answer
Jared,

OK, if you owe $12,410 and your interest rate is 6.8%, and you pay $280 per month, you only have about 51 months remaining on your loan.

1921.28 interest will be paid if you keep making payments of $280.

If you refinance, for 3.9%, you will pay $225 a month for 60 months, and you will have paid $1,065.67 in interest.

So, you save $850 and you will improve your credit score, AND you will have an extra $55 a month, for the next 51 months, or, a total of $2,805.

The none extra payments on the new loan will only be $2,2025, so on a cash flow basis, you will actually save $780!

I would suggest you refinance.

Good luck.  

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Considerable experience in the area consisting of 25 years in both consumer and commercial finance and business management, including 15 years specializing in international Mergers and Acquisitions with over $100 billion in assets acquired Education/Credentials Business administration undergrad Wharton post grad in finance Awards and Honors numerous corporate awards Past/Present clients range from small enterprenurial companies to large multinationals

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