Cars, Insurance, Personal Finance, Saving Money, X Files

Ingenious Car Refinancing – Prosper

prosper ingenious financingThere is nothing that gives me more pleasure than seeing someone take a new technology and use it to their advantage to save money – especially when it is done creatively and produces painless savings. I came across a woman who has done this brilliantly using to lower the amount she was paying on her car loan.

While it’s common to see posts from borrowers trying to consolidate credit card and other debt into a single loan at a lower interest rate or people trying to raise money for a number of different expenses, it’s still rare to come across someone that uses it in an inventive way to reduce their current costs. This is exactly what she did.

It’s common when you receive an auto loan from a bank that the bank will write in certain insurance stipulations as part of the loan to protect themselves since the car is collateral for the loan they are giving. This usually means that the person getting the loan must carry a low deductible and high coverage even though this may not be the most cost effective way to insure the car. She figured this out and found a new way to reduce the cost of her car insurance:

I have a 2001 Camry. I would like to pay it off with a Prosper Loan.
(I’m paying interest on this loan anyway, why shouldn’t real people get that money instead of the bank?)

Current balance on the car: $6700.
Current monthly payment: $ 220.

If I get a Prosper loan at 16% and use it to pay off my car, the monthly payment will be $235. (Yes, that’s a little higher than it is now, but maybe the rate will get bid down a bit. Besides, wait ’til we get to the *genius* part!)

Here’s the GENIUS part:

Current insurance payment: $120/mo. (The bank requires me to carry expensive coverage.)
If I get a Prosper Loan to pay off the car, the new insurance payment will be $70. That’s a savings of $50/mo. Even if the rate on the Prosper loan stays at 16%, that’s still a net savings of $35/mo. Over 36 months, that’s a savings of more than $1200.

She is going to even do better than the $1200 she thought she’d save. With the rate at 10.75% as I write this ( and still 6 days left) she will actually be paying less than she currently is with the insurance savings in addition meaning that she will save a minimum of $1850 and possibly even more if the interest rate keeps dropping.

I like the creative thinking behind the loan that I emailed Caladia and she was kind enough to reply to some of my questions. The first thing I wanted to know was whether or not we were comparing apples to apples here. If she was paying $220 a month and only had 2.5 years left on the loan and was getting a new loan for 3 years, even if she was paying less, it could easily cost her more. She verified her current loan was for 3 more years.

I asked her what she was going to do with the savings. Her reply was:

I plan to do three things with the savings: Pay a bit extra on the Prosper loan, splurge on frivolous things that I wouldn’t otherwise spend money on (mmmm, Sushi!), and bid on other Prosper Loans. (It’s fun!)

While I probably would have given a bit different advice, the fact that she will be putting some toward the new car loan will mean she will pay of the loan even faster and save more. It’s also good to see that she will not spending it all on frivolous things (there is certainly nothing wrong with rewarding yourself when you find these painless savings, as long as 100% doesn’t go toward those frivolous things).

While I don’t spend a lot of time on Prosper, I think her creativity probably will attract a lot of attention to her listing and she agreed:

Absolutely. Lenders on Prosper are generally very savvy when it comes to finances. A plan that involves using a Prosper loan to save money will tend to resonate with them (and get more bids).

I also asked if she had any advice for others that would like to try to do something similar:

Hmmmm… advice for new borrowers… What I did on that first loan that really helped was, I checked out the competition. I did a search for all loans for similar credit grades and similar amounts, looked up the average interest rates (Prosper has a page that tells you this), and read the loan requests.

I think a big mistake a lot of people make is to have very long, wordy listings. Lenders are skimming through hundreds of listings, and they probably won’t read a giant block of text. Keep it as short and to-the-point as possible, and address the two basic things the lenders want to know: *What* is the loan for, and *How* will you pay the loan back (what’s your plan). For the lower credit grades (D, E, HR, NC), a lot of lenders find it reassuring to see a monthly budget, so they know the borrowers do understand how to manage their financial lives.

It shows that if you are willing to think about all the expenses you have, there are steps you can take to save a significant amount of money. Here time and effort for creating a Prosper borrower listing took a few hours at most and will save her over $600 a year for the next three years that goes directly into her pocket. I have to agree with her – genius…

7 thoughts on “Ingenious Car Refinancing – Prosper

  1. I would think long and hard about dropping full coverage on a ~$7,000 car to refinance at loansharking 16% through a brand-spanking-new technology.

    Somebody drove into my wife’s 2002 Ford Focus when it was parked at a grocery store. We had to replace the fender, the hood, coil springs, headlights, and the bumper. The bill was $2,300, but we only paid a $400 deductible.

    Things like “getting driven into in a parkig lot”, or “hitting a deer on the freeway” DO happen. One of the 6,500,000 car accidents a year could involve her even if she’s an expert driver. If this lady can justify saving a grand over three years by dropping to “liability only” insurance, more power to her. I don’t think I’d drop the coverage until my car is worth $3,000 – $4,000.

  2. Prevailing wisdom is to drop a large portion of coverage once a vehicle is over 5 yrs old. I didn’t drop coverage but I did raise my deductible, which essentially halved my car insurance.

    I think this was a great interview with a Propser borrower. Thanks for taking the time to write this post. It definitely makes me less wary of Prosper, and now I know what to look for in a listing. Thanks!

  3. Wow, thank you for the clear, well-written article. You got everything right!

    I’m the person who’s paying off my car with Prosper, and in response to Max’s comment, above, he’s right about keeping at least some insurance.

    I want to make clear that I am *not* dropping comprehensive or collision coverage– like Mapgirl, I’m basically just raising the deductibles from $280 to $1000. (I could manage $1000 if anything were to happen.)

    Also, advice to anyone using Prosper, if you have good credit, set the interest rate as high as you are willing to accept. If you have a good listing, there’s a good chance that lenders will bid the rate down. This is my second loan with Prosper. (I paid the first one off early.) It’s a great site. If you haven’t seen it, check it out!

  4. Great advice. I think it makes lots of sense. Wonderful article.
    Caladia, good luck – btw, lovely name.
    We too maintain fairly high insurance deductibles. In general, most repairs under $1000 you really wouldn’t want to claim anyway. They happen far too often – think of the shopping cart flying into your car door at the grocery.
    The raised premium and claims history effecting renewals would be far too unpleasant.


  5. Caladia’s loan rate has been bid down to just under 9% now. This is because
    A) She posts on the Prosper forums a lot, says reasonable things, so people are somewhat familiar with her
    B) She has an obvious surefire way to pay back her loan. So people aren’t afraid to bid down the interest rate, because they are sure they’ll get paid back.

  6. It takes a lot of effort to work the community at Prosper and get a loan request funded. Though there are many times I question the financial acumen of some borrowers, at the same time, I am thrilled to be able to utilize it in helping friends and family realize some of their dreams. My first loan as a group leader in fact is a good friend who is a truck driver. While his credit grade is terrible, it is his one good avenue to getting a down payment for a truck. As an owner operater he has a good chance of doubling his salary. Without peer-to-peer financing support, this dream could not be realized.

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