What does Auto Loan and Credit Card Dept have in common?

After accumulating an uncontrollable amount of dept with my credit card company I was bound to be on their VIP list for a couple of years with their generous 17% APR. A month ago my wife and I (ok… my wife) decided to take control of our financial situation. The option of calling our credit card company and begging them to lower our interest rate by 1% or 2% was just not enough.

So we went to our local credit union bank to speak with a financial adviser from the loan department. After explaining to her that we wanted to see if we could get a loan to payoff the credit card at a lower rate, she replied to us with a question:”What year and model is your car?”. And I replied a little bit frustrated:”What does our car have to do with this? I’m not applying for an auto loan!”. And that’s where she started explaining that the reason she was asking is because you have the option of borrowing against your car, if it is not payed off.

Here how it works, you can apply for an auto loan with your bank up to the amount of the blue book value of your car. The bank becomes the new owner of the title of your car and you get a loan at a very low rate! In our case we still owed $300 on our car, and the blue book value of our car was evaluated to $12000. So the maximum amount I could apply for was $12000. The best part was the interest rate for our auto loan was at 5.6% for 3 years. Since we only needed $8000, we applied for a loan of $8300 (since we still owed $300 to pay off the car) at a fixed rate of 5.6% for 3 years.

This solution is not ideal if you still owe a lot of money to pay off your car:

blue book value of car = total amount of loan

total amount of loan = Amount owed to payoff car + loan amount needed

So the more you owe to payoff your car the lower the portion of the loan you are getting since both cannot exceed the total amount of loan (which is the blue book value of your car).

If you do borrow against your car and you end up wanting to sell your car before you are done paying off your auto loan, you have to make sure that the minimum amount you are selling your car will be the amount you still owe to the bank on the auto loan. If not you will have to come up with the difference at the time of sale because the bank has to hand over the title to the new owner of the car.

Please note: I am not a professional financial adviser. This solution worked out great in my situation, but it can be different for others. Make sure to consult with a professional financial adviser beforehand.