Pricing a refinance in dollars of cost per dollar of monthly relief

Every refinance into a longer term buys the same thing: a lower payment now, paid for with more total cost later. The trade is not avoidable and is not automatically bad. What you need is a unit price, so you can tell a reasonable trade from an unreasonable one.

The unit is dollars of extra total cost per dollar of monthly relief. Compute it before you look at the monthly payment, because the monthly payment is the number designed to make the decision for you.

The calculation

Three inputs.

1. Your current monthly outflow on the position being refinanced. For a daily-remittance product, multiply the daily amount by the average number of business days in a month — about 21.67. For a weekly product, multiply by about 4.33.
2. Your current remaining total obligation. For a fixed-repayment advance, the unpaid total repayment amount. For an interest-bearing loan, principal plus interest to maturity under the existing schedule.
3. The new deal's monthly payment and total repayment.

Then: extra total cost = new total repayment − current remaining obligation. Monthly relief = current monthly outflow − new monthly payment. Divide.

A worked comparison

Two refinance offers, both for $52,000, both at a 14% nominal annual rate, amortising:

Thirty-six months.
- Monthly payment: $1,777.24
- Total repaid: $63,980.52
- Extra total cost over the $50,400: $13,580.52
- Monthly relief: $15,169.00 − $1,777.24 = $13,391.76
- Cost per dollar of monthly relief: $1.01

Sixty months.
- Monthly payment: $1,209.95
- Total repaid: $72,596.94
- Extra total cost: $22,196.94
- Monthly relief: $13,959.05
- Cost per dollar of monthly relief: $1.59

Both look survivable on a monthly-payment basis. The unit price says otherwise about the second one.

The marginal number, which is the one that decides it

Comparing the two offers against each other rather than against the status quo is more revealing.

Going from 36 months to 60 months buys $567.29 more monthly relief and costs $8,616.42 more in total. That is $15.19 of extra cost for every additional dollar of monthly relief.

The first $13,391.76 of monthly relief cost about a dollar each. The next $567.29 costs fifteen dollars each. The curve is not linear, and the steep part is always at the long end of the term.

So the question stops being "36 or 60?" and becomes: is $567 a month worth $8,616? If the business will not survive week nine without that $567, it is worth it and the arithmetic is irrelevant. If the $567 is comfort, it is a bad purchase.

The second thing the arithmetic tells you

Note what happens to the duration. The old position clears in 3.32 months. The new one runs 36 or 60. You are buying relief for 32.7 or 56.7 additional months of obligation.

That matters in two ways. A longer schedule means a longer window in which something can go wrong — a lost contract, a rate change, a seasonal miss. And it means the UCC-1 and the personal guarantee sit on your file for years rather than months, which constrains what else you can finance.

Set against that, a longer schedule is also more robust to a single bad month. A business with three months of obligation left and one disastrous month has a much larger problem than a business with 36 months left and the same disastrous month.

When the longer term is clearly correct

When it is not

The procedure

1. Write down the current monthly outflow, from bank statements.
2. Write down the current remaining obligation, from a payoff quote, not an estimate.
3. For each offer, compute extra total cost, monthly relief and the ratio.
4. Compute the marginal ratio between the two longest offers you are seriously considering.
5. Ask what the shortest term you can actually service is, and price that one too. Funders quote long by default because it makes the payment small.
6. Check for a prepayment penalty. A 60-month facility you can exit at 24 months without charge is a very different instrument from one you cannot.

What to ask for

Ask for the total repayment amount in dollars on every offer, not just the rate and the payment. Ask for an amortisation schedule. Ask what the prepayment terms are in writing. And ask for the shortest term the funder will approve, alongside the one they led with — the gap between those two quotes is the most informative number in the file.

Terms, fees and prepayment behaviour vary by agreement and by state, so run the arithmetic on your own documents rather than on these figures.