Refinance to consolidate debt?

[jmjj215]

Even if you did trade-in, and got say 18k for it - you're still better off owing 10k than 25k - every time.

[cicy33]

Currently owes $15,000. If trade it in for $10K, have a negative balance of $5K. New vehicle is not going to be less than $15K. No dealer in their right mind is going to do that. so you are still in the same situation unless you can find someone to buy it outright. and most people won't spend that much on a used vehicle. Trading in is not an option. And if they do sell it outright for say $10K. Leaves them a balance of $5,000 to carry on their card. And will still have to find a decent vehicle to drive. Probably minimum of $3000. So now their cost is $8,000. They will be $7,000 less in debt but the used vehicle does have more of a chance of breaking down. This is provided they can find a nice car for $3000. I still think that possibly refinancing and putting their car in it is a better option. That is the one they are paying interest on.

[jmjj215]

You could find a dealer that will take your trade-in and give you a much cheaper used car. That's quite easy to do. You would just take it to a used lot. Also, you ruled out that someone would buy 20k used car - but I forgot that my dad just did - so there are those out there. Check ebay and you'll see used cars going for 20k. So, best bet still would be sell it private party and get that 3k used car. And yes- you can find a reliable 3k used car that would definitely not cost you the difference in monthly savings on repairs. My car cost a smidge over 3k and it's been going great for 2+ years - 0 problems.

The problem with the refi solution is that it only solves the cash flow problem by stretching out the time they're in debt, and moving the debt around. With my solution, they get out of 10k worth of debt and improve their cash flow position - just for driving a junkier car.

Edit: and they don't put unsecured debt onto their home.

[34saving]

I think part of the key here is that Rock doesn't want to drive a junkier car. We're not talking about a bankrupty or foreclosure or reposession . . .we're talking about a refi. Lots of people would do it just for the change in interest rate. Rock indicates they've been financially good their entire lives and will continue to do so. I don't have any reason to doubt her . . . Oh, and if the car loan gets paid off by the refi. then you're trading secured debt for different secured debt. Is that better?

[jmjj215]

Lots of people would do it just for the change in interest rate.

But in that case, the type of debt isn't changing. You're maintaining the same level of debt and just restructuing - apples to orange IMO.

Oh, and if the car loan gets paid off by the refi. then you're trading secured debt for different secured debt. Is that better?

The car debt is secured by the car, a refi is secured by your house - that is very different to me since I don't live in my car

I think part of the key here is that Rock doesn't want to drive a junkier car.

I don't think they're going from junky to junkier. That car must bey pretty nice. My car isn't junky and it only cost 3k. But I guess compared to what merits a $532 car payment, it might look junky next to it in the parking lot...

We're not factoring in RISK into this equation here. What if some other huge emergency happens and now their house is in jeopardy? Perhaps in this hypothetical emergency they could have still made their house payment and simply defaulted on the unsecured debt - now they're house could be taken. Would you really want to put your house on the line? We need to think of WORST case scenarios too - not just best-case. Sure, refing saves money on interest, but quantify the massive risk you are potentially taking by putting your house out there. Make an interest rate outta that and it doesn't look like such a great deal.

[Snoopy2645]

I agree with above poster I would try selling the car also. I have always driven cars that were around 3k & never ever had a car payment & I have always had nice cars they were just usually around 5yrs old. My car I have now I have never ever had a problem with either.

[34saving]

After the refi. they would still have over $45,000 in equity. If a really hard core emergency came up a HELOC could make their mortgage payments for many months. (I think given their credit history they'd rather take a HELOC then default on unsecured debt anyway.)

Oh, my husband and I also drive cars that are over ten years old and my family doesn't consider a car broken in until it reaches 100,000 miles, but I do know financially responsible people who choose a different path for lots of different (many valid) reasons.

[jmjj215]

After the refi. they would still have over $45,000 in equity. If a really hard core emergency came up a HELOC could make their mortgage payments for many months. (I think given their credit history they'd rather take a HELOC then default on unsecured debt anyway.)

That's totally true. I guess I'm just extremely risk-averse. Just sacrifice the nice car for a few years while you recover though - the cash flow problem is solved and you are getting out of debt instead of shifting it around. I'm going to choose to walk away from debt 99% of the time.

I'm not saying they should never have a nice car. I'm saying they're in a bind where they're only seeing a refi as their way out - when in reality there is a much safer (even easier) way out that would get them out of debt faster and not risk their house.

[terry1156]

Another issue you need to consider if you decide to do the car switch is the cost of running the car. If you pick the correct car, the expenses associated with it on a monthly basis may go down quite a bit like your car insurance, cost of gas, etc. Edmunds has a good <A HREF="http://www.edmunds.com/apps/cto/CTOintroController?tid=edmunds.h..topfeatures.smar tbuyer.2.*">true cost calculator</A> that can help you pick the best car.

[jmjj215]

Thanks for that Terry, a great point.

[36Rock]

Well its been a couple of years since I posted this question. Would you all like to know what happened?

Yes, we refinanced the house and got a 5.25% 15 year note for $75,000.

This is how things are now.....

We are debt free except for our home. We currently owe $47,000 on the house worth over $150,000.

I kept my extra jobs, still work them today. Currently have 5 jobs. We are putting 25% of our regular jobs (full time) into 401K. I still have my nice car that everyone wanted me to sell, plan to drive it another 10 years. We still have the same truck as before. We also own a hot rod car worth $35,000 (paid for) my husband built it himself.

I plan to work one of the part time jobs for the rest of 2008 and then I'm stopping. Plan to keep the other two and my small business for a while longer because they are super easy and love the work. My husband plans to retire at the end of this year, I would like to be home more with him.

As for the son who put us in this mess? Well, he hasn't paid much. Was diganosed with Bipolar Disorder which explains his total lack of finance abilities along with other issues. He is a financial mess and we don't help him with finances at all anymore. He is currently in the army which keeps a roof over his head and food in his belly. We love him but won't partake in his financial troubles ever again.

I think we have done fantastic! We are paying extra on the mortage every month and it should be paid off completely in 5-6 years even with my husband retiring.

Yea for us! Thanks for everyones support and advice. It was as a great help!

Good luck to all of you!

D.