After 30 years I’m buying a new car. Because I’m picky, couldn’t find what I want in dealer inventory, and feel I deserve to do this at least once, I’m ordering it new from Ford.
If I finance with the manufacturer, they’ll give me an 84 (!!!) month loan at 4.9% interest and $750 cash back.
My local credit union, on a re-fi will give me 1% of the refinance amount on a 36 month loan at 2.9%.
I can afford to pay off the vehicle. So far as I can tell from asking, neither lender charges a pre-payment penalty.
So, let’s say I let the dealer arrange manufacturer financing. Typically it takes a few weeks before the paperwork comes through and in that time, I go to the credit union and arrange a re-fi. The credit union pays off the loan before any interest accrues. I then go to the credit union and pay off the loan with them.
Net result is that I seem to clear about a thousand dollars. That would be if I don’t actually let any interest accrue. But even if I actually make one or two payments at each lender, the interest I would pay (according to my amortization tables) would still be, at most, a couple hundred dollars putting several hundred into my pocket.
My question is will this work? And since that seems a factual item, I posted this in GQ.
My second question is “would it be ethical?” The lenders have an expectation that they will recoup those come-ons in my interest payments, but I won’t be giving them anywhere near that amount. Effectively, they’re giving me money. I know the car dealer is probably making it up somewhere, but it seems like the credit union only stands to loose on the deal. And if a mod thinks this moves us into a non-fact area and wants to move my thread, that’s fine.
He’ll get the $750 from the dealer, and 1% of the refinanced amount from the credit union. In reality, the dealer will probably just take $750 off of the loan.
Is it ethical? I don’t see why not if the credit union will do it. I did the dealer part back in '13, but I did pay $23 interest because I waited for the first monthly bill.
Oh wait, I get it, you’re going to take out a refi for the full amount but only give the manufacturer the full amount less the $750 (and maybe less a payment or two) and pocket the rest.
Remember, if you tell the bank it’s for a car, they may ask to see the car paperwork which won’t have the $750 since the manufacturer will take that off when they process the loan (on preview I see that was already mentioned).
Also, keep in mind, the $750 that you’re “pocketing”, you’re paying interest on it. If you want it, you can just go to the bank and do a “Cash out refi” and ask for it, you could also ask them to set up a HELOC and they’ll just hand you the money whenever you want, like a credit/debit card secured to your house.
That is a lot of work for relatively little money. However, there isn’t anything unethical about it. The credit union and car company made the rules and it isn’t your problem if they can be exploited a little with some cleverness. You would just be doing a version of what banks were invented for in the first place.
I found a comparable deal a couple of months ago. Citizens bank was offering $500 to open a Gold level checking account and meet some other modest requirements like initial deposit amounts. I opened one and met the other requirements the first day it was available. Now I am just waiting for my $500 to show up and then I am going to close it. I was told that could take up to 4 months. I have had to fill out a lot of paperwork for that stupid account and even had to go through the process of enrolling in online banking so I could see when the money shows up. That is a little too much work for me for the amount of money gained. The car loan process is much worse so keep that in mind when you think about doing it.
Also, one other thing, you don’t need to trick the bank, you can just do a regular refi and ask them for money as long as your credit is good and it doesn’t make your payment too high, they’ll be happy to hand it over to you. If you’re car is going to be 15k, go ahead and ask for 20k, they’ll you have an extra 5k for yourself, but you will be paying interest in it, keep that in mind.
Oh, and if there’s any chance, any chance at all of you defaulting on this loan, I’d think long and hard about securing your car loan to your house.
I would be very very careful about this. Most loans have some sort of penalty if you pay them off early. You may have to pay all future interest they were expecting from you. Or there may be an upper limit on how much extra you can pay per month.
I don’t see why it isn’t ethical. They made the offer and you are taking them up on it. As long as you read all the fine print and comply with it, then I think you’re doing everything just fine.
Do make sure you read the fine as this could make all the difference in answer the other question of whether it will work. Sometimes cash back deals are based on making a certain number of payments or other deals.
By the way, you put (!!!) after the 84 month term. Seems crazy to me too, but the length of car loans are at an all time high, and 84 is now the average. People want more and more features in their cars, but they want to keep the monthly payments low… apparently, the only thing they don’t care about is the bottom line.
Way too complicated for my taste. But if there are no strings attached, I suppose ethical.
Why not go to Ford and ask for $1500 ‘cash back’ and pay it all up front to Ford? They get their money right away and can reinvest at better rates than the 1% they where going to ask from you. Win, win, since you are planning on paying it off right away any way. Assuming you’re are not making good interest on the money that you are planning on paying off the loan.
Often the manufacturer financing comes with costs to the dealer that affects the price to the buyer. A cash deal might save you money by getting the original loan from the credit union.
Something I just thought off, you probably didn’t consider that the refi will have closing costs that will likely be will North of $750.
And regarding the ethical and legal parts, remember, you’re trying to take out two loans on one car without either lender knowing you’re doing it. Now, taking out a refi on your house and asking the bank for cash and using that cash to pay off the car loan is one thing, but if you ask the bank for a car loan or use use the car as collateral in anyway to finance the deal it’s going to fall apart. Whichever bank attempts to secure the lien second isn’t going to be happy.
I’ve done things like this many times. I have never had closing costs on an auto loan, and I have never had early repayment penalties on an auto loan. I have been told they are illegal, but that could be a state thing (or untrue for that matter).
Often, the dealer gets a piece of the loan if they originate it for you. If you let them give you a bad loan, that piece can be significant for them, and they can kick some of that money back to you in a lower price.
My approach: Negotiate a price. THEN ask them if they can do any better if you finance through them. Sometimes they can. Accept the $700 off with the financing at 11% (act dumb) and as soon as you have everything you need refinance.
They don’t like cash buyers as much as they like people who don’t know a bad interest rate.
I’ve never heard of closing costs on a car loan, or an early payoff penalty. When you refinance, the new bank will pay off the original loan. I see no problems with this scenario.
Just to clarify, the OP wants to refi his house to pay off the auto loan. There will most likely be closing costs on that. Those costs will probably be more than $750.
How recent is your experience? Or maybe where are you located? While I’m not taking out many loans, none of the ones I’ve researched in the past 5 or 10 years had any kind of early payoff penalty.
Oh, that makes more sense. In that case I’d check the paperwork. Even if there’s not a early payment penalty, he might want to make sure he doesn’t have to give up the cash back if he pays off the loan in the first X months.
But still, he’s not going to end up with the $750 in his hand, he’ll just get the car cheaper since the bank is only going to let him finance the car for what he owes, not the original price and they’re going to call the current lien holder and ask for a payoff amount.
We’re doing that right now. We got pre-approved for a vehicle loan through our credit union, then when we bought the car we got incentives (and a higher rate) through the dealer. Now that we’ve got the title, we’re refinancing through the credit union (and getting a lower rate). Dealers apparently don’t like it when you do it, but there’s nothing they can do.