What you need to know about debt car refinancing

A financial product “star” in the sky of current personal finances is the reunification or refinancing of debts. Its attractiveness consists of a significant reduction in monthly payments, thus “relieving” the domestic economy. But, go ahead, let’s see the development of this story graphically.

Pedro and Laura have a combined income of 3,000 euros per month. They have 900 euros of a mortgage, and 300 of a car. They also use a deferred credit card each, making a total of 3,000 euros between the two. Each card means a monthly payment of 200 euros. Once all these debts have been deducted, the disposable income is 47% of what they enter.

Of that 47% and once fixed costs are paid (water, electricity, gas, telephone, community expenses, heating), that being conservatives we will assess another 350 euros, they are available to live 1,050 euros per month.

It is at this moment, already quite tight, but still far from paying off their obligations, when “someone” offers them the magic solution: “If you have a flat, you can refinance your debts.” The accent becomes that suddenly, they go from paying 1,600 euros per month to pay 750. “To make this decision is like they raise your salary again …”. There is that.

Now we’ll see what they’re getting into:

His 25-year mortgage is already in half and only have 13 left, his price was contracted to Euribor + 1.5 (currently 2.05% ), and the outstanding debt is 123,500 euros.

The financing of the car was 15,900 euros. The vehicle takes two years out of the five that it was financed. The financier hired him at a fixed 5%. At present, there is an outstanding of 10,000 dollars.

The card is another story, as we discussed in the previous post on credit cards, the debt is consolidated and does not go down every month unless they stop using them. The current total debt is 3,000 euros. Although they do not improve on the issue of cards, within three years, they will lower their monthly payment 300 euros and will be in a better position to liquidate it.

What Exactly Is Being Considered?

The refinancing consists of making a new mortgage on the home including all short-term debts. As it is to refinance debts, a new operation is formed in its entirety, that is, the previous one is canceled, and another is made for the original amount.

Amount: 140,500 . How is it calculated: Pending payment of the current mortgage 123,500 + pending payment of the car 10,000  + pending payment cards 3,000 euros, total: 136,500 euros which is what we owed so far.

To which must be added no less than 4,000 euros of expenses (taxes + notary + registration + opening fee of at least 500 ). I am being restrained regarding expenses since I do not even suppose the commission that the intermediary (not the bank) can take for inducing you to carry out this “advantageous” operation, which can range between 1 and 3% of the capital of the process. Least.

In summary: Mortgage of 140,500 euros, contracted for 25 years, with a new updated price of Euribor + 3.5% (4.05%). Monthly amortization fee 750 euros.

Where are the differences:

  • Mortgage: 123,500 euros of capital + 17,291 of interest.
  • Car: 10,000 euros of capital + 789,52 of interest.
  • Cards: 3,000 euros of capital + an estimated three years of interest of 1,800 euros.

Total current debt: 136,500 CURRENT INTEREST COST TOTAL: 18,260 EUROS. TERM 13 YEARS.

New Debt:

Mortgage: 140,500 euros. NEW TOTAL INTEREST: 83,148.54 EUROS. TERM 25 YEARS.

That is, a bread-like cake, that would be said chastely.

The next risk that our protagonists face is to feel again so “relieved” that they begin to contract new debts in the short term. This “super” operation cannot be repeated with the ease of a credit card and probably can get to jeopardize your home.

In conclusion, there are no shortcuts to orderly overcome a financial situation that can be complicated, it is like taking a tranquilizer to go out and talk in public, it reassures you, but it also leaves you stunned and without reflexes. Apply common sense and learn from experience, if you feel overwhelmed, you know what you do not have to do so that it does not happen again. Do you know any similar case? And you do you think?