Auto Refinancing Fees and Costs: What You Need to Know

Buying a new car is a huge expense, and that is why most individuals get financing to help them pay for the purchase over time. An auto loan is a valuable resource that can help you make a big purchase you can’t otherwise afford.

While your auto loan terms could be ideal and perfectly fit your budget, you might not get the best deal at first. Sometimes, you have to build your credit and prove you can make your monthly payments consistently and on time. That’s where auto loan refinancing comes in.

Refinancing a car is one of the best ways to adjust the terms and costs associated with your auto loan. However, refinancing a vehicle comes with a few fees that can make the decision a little bit difficult. Therefore, it’s essential to know what you will need to pay to refinance in order to make a smart decision for your financial situation.

Why refinance?

The main goal of refinancing a car is to save as much money as possible on your monthly auto loan payments, either by reducing your interest rate or extending your loan term. Refinancing allows you to take out a new loan to repay your existing auto loan, helping you get better terms and boost your overall financial situation. You can refinance your car through the current lenders or take out a loan from a new lender.

The fees associated with auto financing

Most borrowers refinance their cars to save money each month on their auto loans. However, some lender changes certain fees that can reduce the money that you might save with that reduced interest rate. Here are a few possible charges to look out for when figuring out how much it might cost to refinance your car.

Vehicle registration fees

In most states, you must re-register your car when refinancing it. The cost of registering a car varies from state to state and, sometimes, between localities within a state. For instance, vehicle registration fees in Arizona are around $8, while in North Dakota is approximately $274.

Most states adjust their registration fees depending on the vehicle. For instance, vehicle registration fees are based on the car’s weight in many states, such as Virginia, Hawaii, South Dakota, and Washington. Other states, including New Mexico, New Jersey, and North Dakota, consider both the weight and the age of the vehicle.

Iowa and Michigan look into the car’s value, age, and weight. Oregon bases its vehicle registration fees on fuel efficiency and model year. Consult your state’s Department of Motor Vehicles to learn more about when and how they charge registration fees.

Prepayment penalties

Paying off your auto loan early, prior to the scheduled date, can lead to penalties if your contract includes a prepayment penalty clause. This is usually common with car loans that use pre-computed interest.

An auto loan lender will typically charge up to 2% of the remaining loan balance as a prepayment penalty. That means if you still owe $15,000 on your auto loan and decide to close it, you will have to pay $300 as a prepayment penalty.

Certain states, including Massachusetts, Nevada, and Maine, have passed laws that forbid state-run banks and other financial institutions from foisting prepayment penalties on borrowers. However, this also means that private loan providers can still charge you a fee for closing an auto loan early. Since prepayment penalties can work against you in different ways, be sure to look out for this fee when taking out a new loan.

Title transfer fees

Some states may require you to pay a title transfer fee as your car title moves from your old lender to a new one. Depending on your state’s laws, the new vehicle title will either come to you or go to the updated lienholder. Besides the title transfer fee, some states also charge a lien recording fee.

Title transfer fees significantly vary by location. For instance, you can expect to pay a title fee of at least $160 in Wisconsin, while North Dakota and Hawaii charge only $5. Oregon bases your title transfer fee on the model year and miles per gallon (mpg), while in Texas, the fee varies by country. Contact your local Department of Motor Vehicles to help you understand what you should expect to pay as a title transfer fee.

Transaction fees

A transaction fee is basically the cost of doing business. If you terminate your old auto loan, your lender may charge you an administrative or processing fee. There might also be transaction fees linked with the start of the new loan agreement. Most lenders refer to these costs as “lender fees or application fees.” New lenders might be willing to waive this fee, so be sure to ask before committing to a new loan.

Auto insurance cost

The refinancing process may affect your auto insurance. While these are not really fees, they might have a significant impact on your insurance premium.

Some lenders allow you to say goodbye to comprehensive coverage after you have paid off a certain amount of your auto loan. That means you can downsize your insurance payment. Therefore, if you want to reduce costs by dropping comprehensive coverage, check with your auto insurance carrier when you refinance your car loan.

Your new lender might also require you to buy Guaranteed Asset Protection (GAP) insurance. This kind of insurance covers the difference between what you still owe on the financing and the actual value of your car.

Late payment fee

These payments will not be an issue if you make your monthly loan payments on time. Late payment is usually associated with a penalty or fee, and it could negatively impact your credit scores and report. If these fees aren’t paid off promptly, they might also accumulate interest.

If you are having financial issues and know you won’t be able to make your monthly payment on time, notify your auto loan lender as soon as possible. Your lender can help you understand your options, including changing your due date to better align with when you are paid.

Cash payments for upside-down loans

Lenders look at the value of your car and compare it with the amount you owe when you apply for refinancing. If you owe more on your car than it’s worth, this is called being upside down on your auto loan.

Unfortunately, you might have a difficult time finding an auto loan lender when you decide to refinance, but your repayment is upside down. In such a case, your new lender might require you to pay up-front cash payment to make up for the difference between the loan amount and the car value.

Use online resources like Kelley Blue Book to estimate your vehicle’s current value and compare this with what you owe on your existing loan. Consider lowering your loan-to-value (LTV) if it’s over 100% in order to get a better deal when refinancing.

Is refinancing the right option for you?

With so many aspects to consider, it can be difficult to determine whether refinancing your car is a good idea. Fortunately, with the given information, you can easily calculate the cost of financing your car and the possible savings of doing so. If refinancing can, in the long run, save you money, it may be a worthwhile pursuit. Carefully consider all your options and associated fees before financing, and this will give you peace of mind when you make your final decision.