¶ … Refinancing a Car Loan, it's Driver Beware"
Making a purchase of a car on credit is one of the major decisions a consumer will face, perhaps the greatest decision he or she will face, second only to taking out a mortgage on a home. While most consumers pride themselves on making a savvy deal at a dealership, a financial manager must help clients find the best source of credit available to the individual, based upon his or her needs and history. Dealers often do not offer the best rates and banks and credit unions may be better options for the average car buyer.
Refinancing to lower overall borrowing costs has some advantages, and the article cites a specific example, of a buyer able to save $800 by refinancing an 8.75% six-year loan with a new loan that had a 7.49% rate and a five-year maturity. The buyer was able to focus on the long-term rather than the short-term, on interest costs rather than monthly payments. The new loan had a higher monthly payment although it was ultimately more advantageous to the buyer. It may be essential that a financial advisor help the consumer understand that this is in his or her best interest to view payments in a holistic manner, even though there is often a natural psychological tendency for a buyer to think month-to-month, rather than year by year when paying off a loan. Borrowers who focus on the size of their monthly payment may end up paying more in overall interest, and if a buyer can afford to pay a larger monthly payment, by making small monthly sacrifices that can be budgeted with the help of a financial advisor, he or she may emerge the winner from the refinancing bidding wars.
One way to convince a client is to remind the client that a car, unlike a home, depreciates quickly. Homes can increase in value, and often do, but cars, with wear and tear, and the advances in technology usually do not -- something a financial advisor must also remind someone aching to buy a fancy but impractical vehicle, or balking at a good refinancing deal. The buyer must be aware that he or she may owe more than the car is even worth, over time, and ask if it is worth paying more than the car is worth, for slightly lower monthly payments.
