Auto refinancing can save you money, but often there are some fees involved. Even though refinancing may reduce your monthly car payments, it is important to be aware of all the costs associated with the refinancing process.
Early Termination Fee
When you refinance your car or truck loan, you are basically exchanging one loan for another with better terms. However, the original loan agreement may contain a clause for early termination. This means that if you pay off the loan early, you have to pay a fee. These fees are more common with fixed term loans.
Early termination fees might also be referred to as:
- Penalty clauses
- Call provisions
- Closing fees
- Pre-payment fees
Transaction fees are basically the cost of doing business. When you terminate your old loan, you may be charged a an administrative or processing fee. Also, on your new loan, there may be transaction fees associated with the start of the new loan agreement. Some lenders refer to these costs as “application fees”. New lenders may be willing to waive this fee, so it pays to ask.
State Registration Fees
Some states require that you re-register your vehicle upon refinancing. There may also be a required title transfer fee. State registration fees can vary significantly from as little as $10 up to $180. These fees can vary depending upon:
- The state and county where the vehicle is registered
- Vehicle weight
- Engine horsepower
- Your age
- Value of vehicle
- Your driving record
The Nation Conference of State Legislatures provides a detailed state-by-state guide for vehicle registration fees.
Auto Insurance Cost
Your auto insurance can be affected by the refinancing process. These are not really fees, but they may have an impact on your insurance premium.
Some lenders allow you to drop comprehensive coverage after you’ve paid off a certain amount of your loan. This means you can downsize your insurance payment. So when you refinance your auto loan, check with your auto insurance carrier if you want to cut costs by dropping comprehensive coverage.
Your new lender may also require you to purchase GAP insurance. This type of insurance covers the difference between the actual cash value of your vehicle and what you still owe on the financing.
Late Payment Fees
If you make your monthly loan payments on time, these fees will not be an issue. Late payment is often associated with a penalty or fee. Plus, if these fees are not paid off promptly, they may also accrue interest. It is important to be knowledgeable about the terms of your new loan contract.
Up Front Cash Payment
If the current Blue Book value of your vehicle is less than what you owe, this is called being “upside down” on your car loan. This usually occurs when you first take out a loan since the initial payments go towards paying down interest. Once you make enough payment that you begin to pay on the principal, you’ll eventually become “right-side-up” on your loan.
If during the “upside-down” phase of repayment you decide to refinance, you might have a hard time finding a lender. In this case, the new lender might require an up-front cash payment to make up for the difference of the loan amount and the vehicle value.
Auto refinancing can be an excellent way to reduce your monthly expenses. It pays to understand what fees may be associated with the refinancing process. If the new interest rate is low enough, you can still save significant amounts of money even after paying the costs of refinancing.
About The Author
Joe Campanella is the EVP of Business Development for CARCHEX and oversees partner relationships. Joe possesses 12+ years of experience building sales/customer service teams and securing strategic partnerships. He is a sports enthusiast who enjoys mountain biking, surfing and snowboarding in his spare time.
Published in CARCHEX Auto Finance Resources by CARCHEX on November 12, 2014