Bought a minivan with GAP Insurance

[FoolFromAZ]

I bought Honda Oddysey about 4 months ago for $27500 on road which includes GAP Insurance and extended warranty. I got 7.5% APR from Honda for 60 months. The reason why I took the GAP insurance is if collide or meet any accident which results to total damage to the car and when I get money from insurance which would be less than the money that I owe at that time, then GAP insurance would takecare of that difference.

Now I got the offer from US Bank for car loan refinace for same APR but the term is 7 yrs instead of 5ys. It reduces $150 of my car payment. Should I consider that? Is it not better idea to pay less towards principal atleast for the first 2 to 3 yrs?

[Daylily]

In what world would you want to pay more interest?

You didn't state the amount of the loan so I'll assume it is the $27,500. For 60 months at 7.5% this would translate into a payment of $551. Total of 60 payments at $551 = $33,060.

Ignoring that you've probably already made a couple of payments on the original loan and ignoring the possibility that US Bank will charge a fee for this refinance, the $27,500 loan for 84 months at 7.5% works out to a payment of about $422. Total of 84 payments at $422 = $35448.

Do you really want to pay an extra $2388 in interest for the US Bank refinance versus the original loan? I wouldn't think so.

And while we're on the subject of loans period, for the original loan you are paying $33060 for a $27500 vehicle. Why? You also don't mention the cost of this Gap coverage.

[disneysteve]

Now I got the offer from US Bank for car loan refinace for same APR but the term is 7 yrs instead of 5ys.

Why would anyone possibly accept that offer? That means 2 extra years of paying interest and paying more for the car overall. That's ridiculous.

Rule of thumb is to never buy a car if you have to finance it for more than 3 years. If you need a loan longer than 36 months, you probably can't really afford the vehicle.

You are already in a 5-year loan and are asking if you should extend it to a 7-year loan. NOT A CHANCE!

[maat55]

I bought Honda Oddysey about 4 months ago for $27500 on road which includes GAP Insurance and extended warranty. I got 7.5% APR from Honda for 60 months. The reason why I took the GAP insurance is if collide or meet any accident which results to total damage to the car and when I get money from insurance which would be less than the money that I owe at that time, then GAP insurance would takecare of that difference.

Now I got the offer from US Bank for car loan refinace for same APR but the term is 7 yrs instead of 5ys. It reduces $150 of my car payment. Should I consider that? Is it not better idea to pay less towards principal atleast for the first 2 to 3 yrs?

I would save up a couple of thousand dollars and buy a cheap car, then sell the van and borrow for the loss. After paying off the loss I would save and upgrade in car with cash.

The way you have bought this car is a personal finance nightmare. I'm not trying to sound sarcastic or mean, I'm trying to have you realize that you have made a very bad financial decission. As stated by steve, your worst case senario should have been to borrow for 3 years. Buying a 27,000 dollar van will drop in value like a rock. I'm being honest, I would sell the van.

[FoolFromAZ]

In what world would you want to pay more interest?

You didn't state the amount of the loan so I'll assume it is the $27,500. For 60 months at 7.5% this would translate into a payment of $551. Total of 60 payments at $551 = $33,060.

Ignoring that you've probably already made a couple of payments on the original loan and ignoring the possibility that US Bank will charge a fee for this refinance, the $27,500 loan for 84 months at 7.5% works out to a payment of about $422. Total of 84 payments at $422 = $35448.

Do you really want to pay an extra $2388 in interest for the US Bank refinance versus the original loan? I wouldn't think so.

And while we're on the subject of loans period, for the original loan you are paying $33060 for a $27500 vehicle. Why? You also don't mention the cost of this Gap coverage.

Thanks for your reply. I have got around $40K CC debt which I would like to get rid of before paying aggressively towards auto loan.

Reason why I would like to extend the term in auto loan is, that would reduce my monthly payment for now (anyway I will start making extra payment to this loan once I clear CC debt). Another main reason is I have taken GAP insurance and I have paid around $600 for that. In next 3 yrs (hoping to clear my cc debt in 3 yrs), if something happens to my car, GAP insurance will cover the difference between the amount i get from auto insurance and amount I owe on my auto loan. (in that point of view, paying lesser towards principal is better). Anyway I dont have plans to keep this loan for 5 yr or 7 yrs. once i pay of cc, with in a yr from then I would pay this auto loan off.

[maat55]

Thanks for your reply. I have got around $40K CC debt which I would like to get rid of before paying aggressively towards auto loan.

Reason why I would like to extend the term in auto loan is, that would reduce my monthly payment for now (anyway I will start making extra payment to this loan once I clear CC debt). Another main reason is I have taken GAP insurance and I have paid around $600 for that. In next 3 yrs (hoping to clear my cc debt in 3 yrs), if something happens to my car, GAP insurance will cover the difference between the amount i get from auto insurance and amount I owe on my auto loan. (in that point of view, paying lesser towards principal is better). Anyway I dont have plans to keep this loan for 5 yr or 7 yrs. once i pay of cc, with in a yr from then I would pay this auto loan off.

You appear to be in an extreme cycle of consumerism. Having 40k in CC debt and buying a 27,000 van say's you are in an endless debt cycle. Please read The Total Money Makeover by Dave Ramsey and other personal finance books. You need desperatly to change your spending and money management habits. I wish you well.

[disneysteve]

Reason why I would like to extend the term in auto loan is, that would reduce my monthly payment for now (anyway I will start making extra payment to this loan once I clear CC debt). Another main reason is I have taken GAP insurance and I have paid around $600 for that.

I don't understand what the gap insurance has to do with whether or not you should refinance. You need the gap coverage no matter what. Since you chose to buy a new car, the value of which drops about 20% as soon as you take possession, it will be quite a while before you owe less than it is worth so you need to protect yourself in case something happens to the car.

You appear to be in an extreme cycle of consumerism. Having 40k in CC debt and buying a 27,000 van say's you are in an endless debt cycle. Please read The Total Money Makeover by Dave Ramsey and other personal finance books. You need desperatly to change your spending and money management habits. I wish you well.

As maat knows, I'm not much of a Dave Ramsey fan, but in this case I have to agree with his recommendation. Buying a 27K van while carrying 40K in CC debt is a big red flag. Rather than paying down debt, you've increased your consumer debt by about 68%. I'm not sure I'd agree with selling it as you will lose thousands in the process, but I definitely wouldn't extend the payments any more than you already have. Five years is already way too long.

[maat55]

I don't understand what the gap insurance has to do with whether or not you should refinance. You need the gap coverage no matter what. Since you chose to buy a new car, the value of which drops about 20% as soon as you take possession, it will be quite a while before you owe less than it is worth so you need to protect yourself in case something happens to the car.

As maat knows, I'm not much of a Dave Ramsey fan, but in this case I have to agree with his recommendation. Buying a 27K van while carrying 40K in CC debt is a big red flag. Rather than paying down debt, you've increased your consumer debt by about 68%. I'm not sure I'd agree with selling it as you will lose thousands in the process, but I definitely wouldn't extend the payments any more than you already have. Five years is already way too long.

Really steve, he's going to loose more thousands keeping the van. Selling the van will reduce his overall debt load quickly. To me, it's nothing more than a business decission. The van is only a tool that can be replaced.

[disneysteve]

Really steve, he's going to loose more thousands keeping the van. Selling the van will reduce his overall debt load quickly. To me, it's nothing more than a business decission. The van is only a tool that can be replaced.

I guess that's true. So if the van was 27K, let's say he can sell it for 22K (which may be overly optimistic). Where does he get the other 5K? And he then has to go out and buy a used van. Let's say he finds one for 8K. Will he have any trouble getting another loan?

[maat55]

I guess that's true. So if the van was 27K, let's say he can sell it for 22K (which may be overly optimistic). Where does he get the other 5K? And he then has to go out and buy a used van. Let's say he finds one for 8K. Will he have any trouble getting another loan?

I stated in my post that he could save up a couple of thousand to buy a cheap car to get by. Sell the van and borrow the difference. This may or may not be an option, but it is what I would do. After paying off the unsecured note, he could look to replace the cheap car with a newer less expensive car. If he has 500 a month to spend, he can find a way to do this.

He needs to reduce the amount he is paying on this van to get a cheaper car and payoff CC debt.

Here would be my goal: 500 a month = 6,000 a year. 5 year goal.

1 year to payoff loss
1 year to buy replacement car
3 years to apply to CC debt.

These numbers could vary a little, but would be my goal.
Can this be done? I say yes and I would make it happen.

[Like2Plan]

I bought Honda Oddysey about 4 months ago for $27500 on road which includes GAP Insurance and extended warranty. I got 7.5% APR from Honda for 60 months. The reason why I took the GAP insurance is if collide or meet any accident which results to total damage to the car and when I get money from insurance which would be less than the money that I owe at that time, then GAP insurance would takecare of that difference.

Now I got the offer from US Bank for car loan refinace for same APR but the term is 7 yrs instead of 5ys. It reduces $150 of my car payment. Should I consider that? Is it not better idea to pay less towards principal atleast for the first 2 to 3 yrs?

FoolFromAZ,
I would not extend the length of the financing. But, question for you, would the GAP insurance apply to a new loan? That would be very odd if it did. It would be even worse if you did the refinance and then voided the GAP insurance at the same time .

[disneysteve]

FoolFromAZ,
I would not extend the length of the financing. But, question for you, would the GAP insurance apply to a new loan? That would be very odd if it did. It would be even worse if you did the refinance and then voided the GAP insurance at the same time .

Ah. Now I see the issue with the gap insurance. I didn't know how that worked. I wouldn't refinance as it is, but if it would void the gap coverage, that's just one more reason not to do it.

[disneysteve]

Sell the van and borrow the difference. This may or may not be an option, but it is what I would do. After paying off the unsecured note,

How does one go about getting an unsecured loan? Do you just walk into a bank and say, "I want to borrow 5K or 10K" and they run your credit and lend you money with no collateral?

[maat55]

How does one go about getting an unsecured loan? Do you just walk into a bank and say, "I want to borrow 5K or 10K" and they run your credit and lend you money with no collateral?

You sit down with your bank. He's had no trouble getting 68,000 in debt so far, reducing the debt should be doable. The bank may want to do a small HEL. No matter how he gets it done, selling will better his position.

OP needs to get serious about changing his spending habits. Selling this van and focusing on paying off his CC debt is a very good way to get started.

All the things I thought I would miss, I don't. And I certainly don't miss being in debt or worrying about my car breaking down. I have to ask Steve, would you want to be dragging that situatuion out for the next 5 years, not to mention he wants to add two more? This can be fixed without loosing the next 5 years.

[disneysteve]

And I certainly don't miss being in debt or worrying about my car breaking down. I have to ask Steve, would you want to be dragging that situatuion out for the next 5 years, not to mention he wants to add two more? This can be fixed without loosing the next 5 years.

As far as worrying about the car breaking down, I'd be more worried with the old cheap car than with the brand new one.

Would I want to drag this out for 5 years? Not if I didn't have, but right now he has $68,000 in debt. If that could all be taken care of in 5 years, that would be great.

I think your 5-year plan sounds just fine, by the way.