Refinancing your vehicle is a way to adjust the terms and fees associated with your auto loan. However, it comes with a number of refinancing fees that complicate the decision. It’s important to understand what you’ll have to pay to refinance so you can make a smart choice for your financial situation.
Why refinance if there are fees involved? Automatic refinancing allows you to take out a new loan to pay off your existing auto loan, allowing you to lock in better terms and improve your overall financial situation. You can refinance your vehicle through your current lender or take your loan to a new lender. If you’re unhappy with the current terms of your auto loan, refinancing is often a great way to address the problem, despite the fees you’ll pay.
Auto Refinance Fees: What You’ll Pay
Borrowers typically refinance their vehicles to save money. However, applying for a new loan comes with many different fees that could thwart your goals. Understanding all the costs associated with refinancing your vehicle is important so you don’t end up paying more.
If you’re thinking about refinancing, compare auto loan rates here
Some loan agreements have a prepayment penalty. This is a fee that lenders charge if you pay off your loan early. It’s important to pay attention to this fee when applying for a new loan, as prepayment penalties work against you in many ways.
If you’re unfamiliar with the intricacies of auto loan agreements, you may assume that your monthly payment is only minimal. Paying more than the minimum should theoretically help you save on interest and close on your loan sooner. Unfortunately, this is not always the case.
The longer you keep your loan, the more you will pay in interest. Your lender wants to get as much interest from you as possible. Therefore, you will often be charged a prepayment penalty to make up for the loss of interest if you repay the loan faster than expected. Loan refinancing essentially pays off your existing loan and replaces it with another loan. Therefore, you will usually face a prepayment penalty for refinancing if this fee is included in your contract.
Make sure you understand exactly the amount of the prepayment penalty if it applies to you. You will need to determine whether the savings associated with refinancing are greater than the penalty you will pay for doing so.
Transaction and lender fees
Your lender may charge any number of proprietary transaction fees to terminate your existing loan and take out a new one. These have many names, including the following:
Your current loan agreement may contain some information regarding fees associated with terminating your loan. You can ask your potential lender about fees before committing to a new loan. These are usually the easiest fees to negotiate, especially with your new lender.
If you are refinancing with the same loan provider, they may waive these fees since you won’t be taking your business elsewhere. If they are reluctant to do so, you can say that you have a competing offer from another lender who will waive the fees.
Vehicle registration fees
In some states, you must re-register your vehicle when you refinance. Vehicle registration taxes vary significantly. In Arizona, registration fees are just $8, while North Dakota charges $274. Many states adjust registration fees based on the vehicle. For example, in many states, including Hawaii, Washington, South Dakota, and Virginia, vehicle registration taxes are based on the weight of the vehicle. Other states, such as North Dakota, New Jersey and New Mexico, consider both the weight and age of the car.
Michigan and Iowa consider the value, weight and age of the vehicle. Oregon bases its registration fees on model year and fuel efficiency. Talk to your state’s department of motor vehicles to learn more about how and when they charge registration fees.
If you’re refinancing with a new lender, you may have to pay transfer fees as your car title moves from one lender to the next. Depending on your state’s policies, the new title will go to you or the holder of the updated lein. Some states also charge a lein registration fee along with the title transfer fee.
Title rates vary greatly by location. In Wisconsin, you can expect a property fee of over $160. Meanwhile, Hawaii and North Dakota charge just $5. Oregon bases the title fee on model year and mpg. In Texas, title taxes vary by county. This is another situation where contacting your local department of motor vehicles will help clarify things and give you an accurate picture of what you should expect to pay.
Cash payments for flip loans
One thing lenders look at when you apply for a refinance is the value of your car compared to the amount you owe. If you owe more than its value on your vehicle, your loan is considered upside down.
Lenders look at your loan-to-value (LTV) ratio to determine if your loan is upside down. This is a percentage they calculate by dividing your loan balance by the value of your car. Most lenders will not consider a loan for any vehicle with an LTV above 125%. One study found that 90% of loans were to borrowers with an LTV of 123% or less.
You can use resources like Kelley Blue Book to estimate your car’s current value and compare it to what you owe on your current loan. If your LTV is above 100%, you should consider lowering it to get a better deal when refinancing. Some lenders won’t even consider refinancing a vehicle if you’re upside down, so this is an expense you’ll have to deal with if you intend to get a new vehicle loan.
Determine how much you will have to pay to keep your LTV below 100%. Refinancing may not be the right path for your current situation if you can’t afford this amount right now.
How refinancing affects your credit
Refinancing your vehicle affects your credit score in several ways. Every time you apply for a new loan, your credit score drops slightly. While this doesn’t cost you anything initially, having a lower credit score will affect the interest rates and terms available to you on future lines of credit. If you’re thinking about buying a home, taking out a personal loan, or applying for a new credit card soon, you need to consider how to prioritize these actions. For example, you may want to wait to refinance your vehicle until you get the best mortgage rate possible.
Closing your previous loan will also reduce your credit score. Auto loans are typically long-standing, high-value accounts and can have a significant impact on your overall credit report. If the loan was in good standing before closing, the impact is somewhat minimized.
If you don’t plan on applying for a mortgage loan for a few months or years, refinancing could improve your credit score in the long term. A solid payment history increases your credit score. If your new loan makes it easier for you to make timely payments on your vehicle, that can help you improve your score.
When preparing to refinance, it’s always wise to compare different loan offers. Don’t drag out this process. In most cases, multiple loan requests within 14 days are counted as a single request rather than several. Some credit scoring models even group queries over 45 days. The quicker you can make comparisons, the better.
How refinancing affects your auto insurance
Your lender may have strict requirements regarding the type of auto insurance you must carry with your loan. If your new lender has different rules than your old one, refinancing can increase or decrease the amount you pay for car insurance.
Most lenders require comprehensive insurance coverage for any financed vehicle. In some cases, however, you can drop to the state-required minimum coverage once you pay off a certain portion of your auto loan. Check with your new lender to determine if and when you can do this. If you do not wish to continue to have comprehensive coverage, this may reduce your monthly insurance premiums. Keep in mind that lowering your coverage reduces your overall protection in the event of an accident.
Guaranteed Auto Protection (GAP) coverage is another type of insurance often required by lenders. If your loan is upside down, GAP insurance covers the difference between what you owe on the vehicle and what it’s actually worth. This can help you pay off your loan if you total your vehicle. If you need to add GAP insurance to your new loan, you’ll need to consider this cost along with the other fees and charges associated with refinancing. If you have GAP insurance but are now allowed to opt out, you can benefit from additional savings.
Is refinancing the right option?
With so many factors to consider, determining whether refinancing your vehicle is the best option can be difficult. Using the information above, you can calculate the cost of refinancing your vehicle and the potential savings that would result. If refinancing ultimately saves you money, it can be a worthwhile endeavor.
If your savings are negligible or nonexistent, you should carefully consider whether refinancing is right for you. If you’re having trouble making your car payments, it could still be a smart plan, as it can reduce your monthly car payments. This helps you avoid late payments, missed payments, or defaults on your loan.
Carefully consider all options and associated costs before refinancing. This will give you peace of mind when making your final decision.
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