Fees to Expect when Refinancing an Auto Loan

Most people think they will save money through refinancing an auto loan. While this is generally true, the amount they save may be significantly reduced by fees. These fees are the lender's way of making sure they do not lose too much profit through allowing the refinance. Pay attention to these penalties to weigh the pros and cons of refinancing.

Standard Refinancing Fee

Most borrowers will attempt to refinance directly with their lender. In a direct refinance, the terms of your loan will change, but the contract will remain the same. The lien holder is still the original lender. This type of refinance is often the hardest to get approved because the lender has no real incentive to provide you with the option. If you do secure the opportunity to refinance directly, you may be subject to standard fees with the lender. The fees tend to be highest with a loan directly from an auto dealer or manufacturer. Private banks usually have lower fees because their interest rates tend to be higher from the get go.

Loan Origination Fee

At times, you will need a wholly new loan contract to go through with the refinance option you choose. This typically occurs if you are changing more than the interest rate or terms alone. For example, extending your loan an additional 5 years may require a new contract. Paying down a portion of your loan in one lump sum may also require a new contract as the principal sum owed was reduced. In both cases, the lender may charge you a new loan origination fee. This fee goes to cover the cost of processing the loan terms again. Basically, it is a commission for the lending agent who handles your refinance.

Prepayment Fee

At times, you will need to approach a third party in order to refinance your auto loan. You will take a new loan from the third party in a sum large enough to pay off your existing loan. When you use these funds to prepay the loan, you have no further obligation to the original lender. However, that original lender can charge you a hefty prepayment fee. The new lender can also charge you an origination fee of their own. The result can be fees that are so high your savings are significantly reduced. Only opt for this course if you are using it to avoid default or the savings cover the losses.

Credit Penalties

Refinancing, especially third party refinancing, is a form of contract modification. Whenever you modify a contract, you are breaking the initial terms you agreed on with the lender. As a penalty, the lender will report you to the credit agency. You can avoid this credit penalty by modifying directly and paying some fees. However, sometimes the penalty is unavoidable, and you may see rates on other adjustable rate loans rise as a result. It is hard to measure the cost of this penalty since the cost is not direct. You should always consider credit repercussions, though, when you modify.


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