Refinancing a car loan?

[GrayMatterWife]

To clarify, because I realized WCI's initial response seems like he thinks I'm a moron, there is no way to specify, when I make the payments, that the overage is to go to the principal. There is no penalty (that I know of) for paying it off early. I just want to pay less interest because it is a high interest loan.

OK. That's different than a prepayment penalty. Your contract should specify whether there is a prepayment penalty or not. If there is not, you CAN make payments early. If they are telling you that there is "no way to specify how to do that," they are either giving you the run around, are ignorant, or are lying. Call them, cite to the provision of your contract that allows you to make non-penalized prepayments of principal, and ask to what address such payment should be sent. If they cannot tell you, advise them that you have the right under the contract to make such payments, and if they refuse to confirm the address for receipt of such payments, you will ask your attorney to contact them. Ask to speak with the next-higher-up person. TAKE GOOD NOTES--names and dates and details of the people/conversations.

Once you know where to send the payments (honestly, the principal-only payments should be sent to the same address as your monthly minimum payment is), the safest thing to do is to make two, completely separate payments every month. (Note: you cannot pay principal-only until you have paid whatever is due for the month and you are completely current). First, make the payment in the amount that you owe (principal and interest), then second--after the first payment and separately--make a payment for additional principal. Do not make the principal-only payment electronically. It should be made by old-fashioned check, on which it is CLEARLY written "principal only" and should be accompanied by a letter stating that (1) the account is completely up-to-date (all due and owing amounts for the month are paid) and (2) the payment included is for principal-only. I did this for two years while I paid off my law school loan--every month, I sent in two payments, one for the amount owed, and one for the additional principal. AND, every single month, you must CALL and CONFIRM (if you can't see the application online) that your principal-only payment was properly applied (my school loan lender screwed up the application a couple of times).

PM me if I can help.

[v-girl]

Thank you, GMW! That is what I needed. I'll have DH call this week (the loan is in his name). My mom does this with her mortgage payments -- I've had to send them for her when she's out of town.

[The White Coat Investor]

WTF? WhiteCoatInvestor: assuming you're the guy who runs the whitecoat website--we've all seen your website and many of us enjoy it. But , FWIW, and speaking only for myself: your attitude is not welcome or productive, so stow it. You don't know any of us, and you come off as a condescending jerk.

And for your information, yes, it is legal. Some lenders--especially on high-interest loans or for higher risk borrowers--are notorious for penalizing for prepayment or simply not allowing it. Most likely: no matter what she pays every month, she is charged interested on the principal she owes under the terms of the loan, not based on the principal she actually has outstanding, or she is paying a monthly penalty for the prepayment.

First of all, apologies to the OP and anyone else. Tone is very hard to convey on the internet, and I certainly didn't mean to sound condescending or to imply anyone is a moron. I apologize for the phrasing that caused anyone to think that.

The OP and spouse certainly aren't morons. But they are doing what many, perhaps even the majority of Americans, even medical families, tend to do with their cars. That is, they buy a car, perhaps new, perhaps a few years old, on credit. Then they make payments for 2, 5, perhaps even 7-10 years. At some point, about the time the car wears out, the car is paid off. Then they either choose to get a new car, or they have to get a new car when the old one dies. The end result is that they spend the vast majority of their lives making a car payment. As the income goes up, they simply do it with more and more expensive cars. Habits like that don't magically change upon med school or residency graduation.

Wealthy people generally receive interest, rather than pay it. An important component of the ability to acquire wealth is avoiding financing things. Financing something, by definition, is buying something you can't afford. Now, at times in life we have to do this. Perhaps med school loans. Perhaps a mortgage. Perhaps even an inexpensive but reliable used car in the med school or residency years. That's okay. But it's not a habit you want to get into. It might be "normal" to buy cars on credit, but if you do so, you'll get "normal" results, i.e. never accumulate any wealth.

I had an email exchange with an FP today. He and his disabled wife (she was a med stud too when disabled) are nearly 60 and until recently had more liabilities than assets. A negative net worth despite a lifetime of physician-level paychecks. You want to ask yourself, what decisions did they make along the way to get to that point? Then avoid them.

One of those decisions that trips up a lot of Americans is simply burning too much money on transportation. A car costs you a certain amount of money every year (I'm not talking about gas.) If you buy a $40K car, drive it for 3 years, spend $800 a year insuring it, spend $600 a year maintaining it, and sell it for $20K, then your cost of ownership is about $8K a year. If you buy a $5K car, spend $1000 a year maintaining it, $200 a year insuring it, and after 3 years sell it for $3K, your cost of ownership was $1800 a year. Both cars get you where you need to go, but one of them leaves you with a lot more money in your pocket.

If you need a car, and don't have any money, then buy a car with a car loan. But get the lowest interest rate you can get, keep the term as short as you can, and buy as little car as you can get away with. Then, when it is paid off, keep paying your car payment into a car fund, and never buy a car on credit again.

The best deal on transportation I ever had was a car I bought for $1850 shortly after residency graduation. I commuted to work in it for 4 years, then sold it for $1500. Meanwhile, I did a few oil changes, bought a new set of wipers, and replaced the battery. It was a heckuva deal. We had a little nicer car that we took on road trips and drove the kids around in, but the decision to limit transportation and housing expenses made a dramatic difference in our financial situation. After a couple of years, we bought the car we really wanted, for cash.

Anyway, it's just a philosophy thing. I apologize for the tone of the earlier post. It was inappropriate.

[PrincessFiona]

I would suggest that our long-standing members need to consider their tone.

Kris

[Sheherezade]

LOL Princess Fiona. You are a funny lady.

[diggitydot]

I would suggest that our long-standing members need to consider their tone.

Kris

I agree.

And WCI, I apologize. I didn't intend to begin a dog pile on you and it wasn't fair. You have extremely valid and pertinent information that we can all benefit from utilizing. I hope you stick around, get to know us better, and give us a chance to get to know you better, too.

It's almost a rite of passage around here for someone to misinterpret the intent of one of our newer members (because we don't know them and they don't really know us), but we all get past it and move on. You've just done it a little earlier than others.

Please stick around.