My Mother Gave My Sister a Big Gift. Now She’s Offering to Even the Score.

Pay Dirt Photo illustration by Slate. Photo by Getty Images Plus. Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!) Dear Pay Dirt, I did not get my driver’s license till after college, while my twin had hers before college. My mom’s old car went to my twin, and she just traded it in and got a few thousand dollars for it. My mom has now offered to put $2,000–$3,000 towards my car loan. I figure it’s a good opportunity to refinance my car loan, especially since the interest is almost 9 percent. The car is five years old and hasn’t hit 100,000 miles yet (I got it used). The loan is currently around $18,000, and I pay $418 a month on it, with 51 months left. What I’m trying to figure out, is if it’s better to put the cash from my mom down first, and then apply to refinance, or refinance the loan as is and then put the extra money down? My priority is a bit more monthly savings, but I don’t really want to stretch the loan out further. Using the current balance with quotes at a 5.5–6.25 percent interest rate, keeping a similar length doesn’t seem to change the monthly payments much. —Car Cost Conundrum Dear Car Cost, Let’s look at the basics of refinancing. When you refinance a loan, the lender looks at several factors like your credit score, the amount you want to borrow, and the car’s age, mileage, and value. It probably makes the most sense to put the money down first, then refinance. That means you’ll be refinancing a smaller balance, which means you’ll be borrowing less. And that means your new monthly payment should be lower than it would be if you refinanced the full $18,000, especially if you can get a loan that’s in the 5.5 to 6.25 percent range as opposed to your current nine percent. The reason you’re not seeing a huge difference when you crunch the numbers is that the savings is spread out over the life of the loan. If your goal is to have a lower monthly payment, you can lengthen the loan, and the numbers might change, but the difference will probably still be moderate. Of course, stretching out the loan term will also increase the total interest you pay when everything is said and done. The point is, paying a lump sum will still mean you’ll save money in interest over time, and you can even choose to pay off the loan sooner. Just make sure that when you make that payment, you confirm with the lender that it’s being applied to your principal balance and not future interest. Some lenders might charge prepayment penalties or fees, so make sure to look into that, too. If you refinance first, then make the payment, you’d still reduce your overall balance, but the loan terms are fixed, so your monthly payment would stay the same, you’d just be done with the loan sooner than originally planned. Extra payments reduce the balance faster, which means you’d pay off the loan sooner, but they don’t automatically lower your monthly bill. Some lenders do let you recast your loan, though, so you can stretch it back out and lower the payment. Again, you’d be paying more in interest this way. Before going with either option, though, make sure to shop around and look beyond the monthly payment—look at interest rates, loan terms, fees, total interest. If you can refinance the smaller balance at a lower rate and for roughly the same number of months you have left now, that’s a sweet spot. You’ll get a lower monthly payment without dragging the loan out longer. Paying off a chunk of the principal before you refinance will help you do that. In short, if lowering your monthly payment is the goal, I’d make the $2,000–$3,000 principal payment first, then refinance the remaining balance, as long as the refinance offer is solid and there aren’t big fees or penalties. —Kristin Please keep questions short (<150 words), and don‘t submit the same question to multiple columns. We are unable to edit or remove questions after publication. Use pseudonyms to maintain anonymity. Your submission may be used in other Slate advice columns and may be edited for publication. Classic Prudie Recently, my stepdaughter and her girlfriend came over. We thought they were going to announce their engagement. Instead, my husband and I were subjected to a pretty polished essay about how awful we were to my stepdaughter growing up. Never miss new Slate Advice columns Get the latest from Prudie and our columnists in your inbox each weekday, plus special bonus letters on Saturdays. Advice Family Personal Finance