 Upside
down in a car loan
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 Dear
Dr. Don,
I have a new 2005 car with 47,500 miles already on the odometer.
Since I purchased the vehicle my credit score has greatly improved,
from about 615 to 715. So now my No. 1 goal is to lower my interest
rate from 9.2 percent to something lower and/or lower my monthly
$500 car payments.
I tried to sell the car but the high mileage reduces
its value and I'm upside down in the loan -- a lot. My next option
would be to refinance, only I don't understand this process well.
Can you help and give advice on the best thing to do? I still owe
$21,000 and have 54 months left to pay. Thanks.
-- Ronnie Runabout
 Dear
Ronnie,
It's clear you get around. Being upside down in the loan not only
makes it difficult to sell the car, since you have to make up the
difference between the selling price and the outstanding loan balance,
it also makes it harder to refinance the car. Auto loans are secured
loans. If your car is worth $15,000, and you need to refinance $21,000,
then the lender is taking on $6,000 in unsecured risk.
Even with your improved credit score, you're not likely
to get a better interest rate by refinancing this car. If it's any
consolation, Bankrate's national average for a 36-month used-car
loan is 8.85 percent. Refinancing your 54-month loan is likely to
be at that rate or higher, which isn't that different from your
current rate of 9.2 percent.
In the year that you've had the car, interest rates
have backed up quite a bit, so even though you've improved your
credit score, the combination of being upside down in the loan and
the rising interest rate environment makes refinancing untenable.
A home equity loan might get you out of this auto
loan. A home equity loan is a fixed-rate loan over a fixed term
with set monthly payments. The national average this week for a
home equity loan is 7.69 percent. If you can deduct the mortgage
interest expense on your taxes the effective (after-tax) rate will
be even lower. I don't like the idea of you taking up to 10 years
to pay off a car that isn't likely to last you that long, especially
given your high mileage driving habits, but that is a possible solution.
After all, you don't have to take 10 years to repay the note.
Since your second goal is to reduce your monthly payments,
I'll make the leap and assume that making additional principal payments
to pay off the loan faster isn't an option. If I'm wrong and there
is room in your monthly budget for additional principal payments,
make sure the loan doesn't have a prepayment penalty and isn't subject
to the "Rule of 78s" before actually making additional
principal payments. Check your loan agreement for these items, and
read the Bankrate feature, "Steer
clear of the perilous 'Rule of 78s'," to learn more about
the Rule of 78s.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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