Everything You Need to Know About Auto Refinancing Fees

car that's been refinanced
Auto Refinancing Fees: What You Need to KnowMarin Tomas - Getty Images

Refinancing your vehicle is a way to adjust the terms and expenses associated with your car loan. However, it comes with a host 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? Auto refinancing allows you to take out a new loan to pay off your existing car 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 your car loan's current terms, refinancing is often an excellent way to address this, despite the fees you'll pay doing so.

Auto Refinancing Fees: What You'll Pay

Borrowers typically refinance their vehicles to save money. However, taking out a new loan comes with many different fees that may act counter to your goals. Understanding all the costs associated with refinancing your vehicle is important so you don't ultimately end up paying more.

If you are thinking about refinancing, compare auto loan rates here

Prepayment Penalties

Some loan contracts include a prepayment penalty. This is a fee lenders charge if you repay your loan early. It's important to look out for this fee when taking out a new loan, as prepayment penalties work against you in many ways.

If you're not familiar with the intricacies of car loan contracts, you might assume that your monthly payment is just a minimum. Paying more than the minimum should theoretically help you save money on interest and close out your loan sooner. Unfortunately, this isn't always the case.

The longer you hold your loan, the more you'll pay in interest. Your lender wants to get as much interest from you as possible. Therefore, it will often charge a prepayment penalty to compensate for lost interest if you repay the loan faster than expected. Refinancing your loan essentially pays off the existing loan and replaces it with another loan. Therefore, you'll usually face a prepayment penalty for refinancing if this fee is included in your contract.

Ensure you understand exactly how much the prepayment penalty is if this applies to you. You'll need to determine if the savings associated with refinancing are greater than the penalty you'll pay to do so.

Transaction and Lender Fees

Your lender may charge any number of proprietary transaction fees to terminate your existing loan and draw up a new one. These go by many names, including the following:

  • Transaction fees.

  • Lender fees.

  • Application fees.

  • Processing fees.

  • Administrative fees.

Your current loan contract may have some information regarding the fees associated with terminating the loan. You can ask your prospective lender about their fees before committing to a new loan. These are usually the easiest charges to negotiate, particularly with your new lender.

If you're refinancing with the same loan provider, they may waive these fees since you're not taking your business elsewhere. If they're hesitant to do so, you can mention 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 refinancing it. Vehicle registration fees vary significantly. In Arizona, registration fees are just $8, while North Dakota charges $274. Many states adjust their registration fees by vehicle. For example, vehicle registration fees are based on the vehicle's weight in many states, including Hawaii, Washington, South Dakota, and Virginia. 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 vehicle's value, weight, and age. Oregon bases its registration fees on model year and fuel efficiency. Speak with your state's department of motor vehicles to learn more about how and when they charge registration fees.

Title 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 either go to you or the updated lein holder. Some states also charge a lein recording fee alongside the title transfer fee.

Title fees vary greatly by location. In Wisconsin, you can expect a title fee of more than $160. Meanwhile, Hawaii and North Dakota charge just $5. Oregon bases your title fee on the model year and mpg. In Texas, title fees vary by county. This is another situation where contacting your local department of motor vehicles will help clear things up and help you get an accurate picture of what you should expect to pay.

Cash Payments for Upside-Down Loans

One thing lenders look at when you apply for refinancing is the value of your car compared with the amount you owe. If you owe more on your vehicle than it's worth, your loan is considered upside down.

Lenders look at the loan-to-value (LTV) ratio to determine if your loan is upside down. This is a percentage they calculate by dividing the balance on your loan by the value of your car. Most lenders won't consider a loan for any vehicle with an LTV over 125%. One study found that 90% of loans were for applicants with an LTV of 123% or less.

You can use resources such as Kelley Blue Book to estimate your car's current value and compare this with what you owe on your current loan. If your LTV is over 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 face if you're set on getting a new loan for the vehicle.

Determine how much you'll have to pay to get 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 Impacts Your Credit

Refinancing your vehicle impacts your credit score in several ways. Any time you apply for a new loan, your credit score drops slightly. Though this doesn't initially cost you anything, having a lower credit score will affect the interest rates and terms available to you on future lines of credit. If you're thinking of purchasing a home, taking out a personal loan, or applying for a new credit card soon, you must consider how to prioritize these actions. For example, you may want to wait to refinance your vehicle until you've secured the best mortgage rate possible.

Closing out your previous loan will also lower your credit score. Car loans are typically longstanding, high-value accounts and can impact your overall credit report significantly. If the loan was in good standing before you closed it, the impact is somewhat minimized.

If you're not planning to apply for a mortgage loan for a few months or years, refinancing may improve your credit score in the long run. A strong payment history boosts your credit score. If your new loan makes it easier to make timely payments for your vehicle, this can help improve your score.

When you're getting ready to refinance, it's always wise to compare several loan offers. Don't drag this process out. In most cases, multiple loan inquiries within 14 days are counted as a single inquiry rather than several. Some credit scoring models will even lump queries together over 45 days. The faster you can make your comparisons, the better.

How Refinancing Impacts Your Car Insurance

Your lender may have strict requirements about the type of car insurance you must carry with your loan. If your new lender has different rules than your previous one, refinancing may increase or decrease what you pay for car insurance.

Most lenders require comprehensive insurance coverage for any vehicle they finance. In some cases, however, you can drop to the state's minimum required coverage once you've paid off a certain portion of your car loan. Check with your new lender to determine if and when you can do so. If you don't want to keep carrying comprehensive coverage, this may lower your monthly insurance premiums. Do consider that lowering your coverage reduces your overall protection in the event of an accident.

Guaranteed auto protection (GAP) coverage is another type of insurance lenders often require. If you're upside down on your loan, 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 have to add GAP insurance for your new loan, you'll need to consider this cost alongside the other expenses and fees associated with refinancing. If you have GAP insurance but you're now permitted to drop it, you can enjoy some added 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 of doing so. If refinancing ultimately saves you money, it can be a worthwhile pursuit.

If the 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 may still be a smart plan, as it can lower your monthly car payments. This helps you avoid late payments, missed payments, or defaulting on your loan.

Carefully consider all your options and the associated costs before refinancing. This will give you peace of mind when you make your final decision.

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