So I refinanced my car, I did this for a few reasons first was an interest rate reduction from 1.99% to 1.49%, my old car loan balance was $18,556.95 and I had 35 months left on it. My new car loan was for 60 months and for $29k.
Why would I borrow more money and extend the loan, even when saving .5% in interest that can’t be a cost or interest savings move. So let me tell you why I did this, first off I keep my car value on my net worth spreadsheet at $23,170 which is the Edmund’s private party value of my car with my mileage and the condition being good, I think this is a fair value as I was offered $20k from a dealer on a trade in. So on my old loan I had about $4,600 in equity, but PenFed my lender uses the Kelly Blue Book trade-in value with excellent condition for their underwriting, my guess is they want lenient valuations so they can lend more, either way they said I could borrow 100% of the value up to $29k.
So I borrowed $29k for 60 months at 1.49%, which left me with $10,443.05 in surplus cash, for the first 29 days I paid down my HELOC at 2.49% so I earned 1% by saving on interest paid in total $8.30. On 1/28 I purchased 917.667 shares of a mutual fund with the ticker DLTNX which cost exactly $10,443.05. On 1/31 DLTNX paid a $.0435 per share dividend and the total payout was $39.92 which was automatically reinvested. DLTNX is a bond mutual fund that invest in a combination of agency and non agency debts backed by real estate, the fund manager has a 2 year track record with this fund (the manager founded the fund only about 2 years ago), he has about 20+ years as a fixed income manager with previous funds and his reputation and returns have been very stable. DLTNX is currently yielding 5.67% (a blend of taxable and tax free so a real rate can only be calculated at year end). The difference in the cost of funds 1.49% to the yield 5.67% is 4.18% and if you look at the price history the trend is generally up and at a very slow pace, in my opinion I am taking very little risk for a decent return.
My new car payment also dropped from $546.18 to $502.08 a savings of $44.10 a month, I plan on doing automatic investments into DLTNX with the savings alongside the automatic reinvestment of dividends.
At the point when my previous car loan was due to be paid off (35 months from when I paid it off) I will stop contributing to DLTNX and instead I will sell off $502.08 worth of shares every month to pay the remaining monthly loan payment on the car loan, so from a cash flow perspective my outflows will be identical to loan before the refinance but I will also have a safe high yield mutual fund growing for the next 5 years, in the end I have turned my car a depreciating asset into an income generating asset and when the loan is paid off the remaining mutual fund value will be completely unencumbered.
I will post monthly updates with the current values of the mutual fund, car value and loan value. I will also use the current yield and calculate my expected return on this investment strategy.