When buying a new set of wheels, people tend to focus on the color, the fuel efficiency and the gadgets in the car rather than reading the fine print in the loan contract. Fast-talking dealers may hook you up with the car of your dreams and gloss over the fact that you are paying an arm and a leg to finance the vehicle. You can have the last laugh if you quickly refinance your car with a low-cost loan. However, while nothing prevents you from refinancing your car, some loan contracts include clauses that make refinancing -- even with a low-interest loan -- a decidedly unattractive option.
When you finance a car, you borrow a sum of money and sign an agreement enabling the creditor to take possession of the vehicle if you renege on the debt. The loan comes into effect when the lender records a lien on the vehicle at the local department of motor vehicles. You can have the lien removed by providing the DMV with evidence that you have settled the debt. Typically, when you refinance your loan the new lender will handle this process on your behalf. As long as you pay the debt, your existing lender cannot legally stop you from refinancing the car with a new lender.
Government entities have to generate income to cover operational expenses, and the DMV is no exception. In many states, you have to pay a recording fee whenever you place a lien on a vehicle. In Alaska this fee amounts to just $15 but other states charge much more, and in states such as Florida you may have to pay a documentary stamp tax or additional fees. Take these costs into account when you calculate the money you can save in terms of interest by refinancing your loan.
In most instances, interest accrues on a car loan over the entire loan term. This means that you can save money if you pay off your loan before the end of the loan agreement. Refinancing to a low-interest loan will result in even greater savings. However, some lenders write add-on interest loans, in which case the entire interest due on the loan gets added to the principal at the outset. This means you have to pay the total interest due regardless of whether you pay the loan off within one day or the complete term of the loan. If you refinance an add-on interest loan you end spending even more because you now have to pay the total interest due on the original loan and a second set of interest on the new loan.
Most lenders cap automobile loans at five or six years, which means that you have less time to realize the cost savings when you refinance than you would if you refinanced a 30-year home loan. Lenders are often just as aggressive as car salespeople about promoting their products, so you need to do your homework before submitting a new loan application. You can have the lender do the homework for you by asking for a cost comparison between the existing loan and the proposed refinance.