Car Loan Refinancing Costs

Written by Jeremy Horelick
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There are a multitude of costs that may be associated with refinancing your auto loan. The fact that some lenders prefer a "gentle" approach that doesn't backload products with fees and penalties gives those lenders a competitive edge in this tight-margin industry. Often, exemption from these costs is significant enough to make a higher-priced product a better all-around bargain for loan-hunters.

How and where exactly can lending institutions hide their fees? The unfortunate answer is that they can do it all over the place. They can charge you for your initial loan application, assess "origination" fees, and penalize you for early pre-payment, much the way that home mortgage lenders can. Additionally, there are costs associated with auto refinancing that are unrelated to your lender, such as new registration materials and tags.

Adding It All up

In the grand scheme of things, deciding whether or not to refinance involves a careful consideration not just of fees and penalties, but of all costs associated with taking out a loan. You may want to start a spreadsheet and compare your two paths side by side. Scenario one is keeping your current loan at its fixed rate for its entire term. Scenario two is the re-fi option.

In two vertical columns, add up the monthly costs of your loan both in interest and principal, keeping in mind that refinancing early on can have the greatest benefit. After all, it's primarily interest payments with which you're faced at the beginning of your term. Then calculate your monthly payments under your improved interest rate and add in the cost of your pre-payment penalty if applicable. If the difference is negligible, it may be easier to stick with your current loan and wait until interest rates drop more substantially. Otherwise, go ahead and get the ball rolling.

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