I am in the process of trying to refinance an auto loan. I got 4.69% a year ago and should be able to do better now.

The loan balance is about $13,000. I called to refi through the same company and she informed me I would either have to pay a $299 fee or add $1000 to my loan in exchange for $1000 cash (immediately) for use on anything other than the loan.

I asked what is to stop me from using it on the loan right away since I am permitted to pay more than the minimum. She drew a blank and just flat out didn't know.

It seems the 1000 for 1000 exchange is a better deal since I can just dump it right into the loan and the interest paid on it will be minimal but I am no expert.

I'm located in New Jersey, but the loan is through a company in California.

Can anyone shed some light on any potential gotchas with this, as it sounds fishy to me?

  • Where are you located geographically? You can edit your question and add a country tag like united-states or canada to help us tailor answers to your situation. – John Bensin Aug 16 '13 at 16:03
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    I added the united-states tag to your question; this site has members from all over the world, so specifying a country/region is important. – John Bensin Aug 16 '13 at 16:07
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    What are the exact terms of the contract? is there a temporary lockout on overpaying? – im so confused Aug 16 '13 at 16:08
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    She stated that the cash couldn't be used on the loan. You ask why not since you could pay more than the minimum and it may be that this is a really rare question but there should be a standard answer here I'd think. – JB King Aug 16 '13 at 16:53
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    Most likely the salesperson gets commission based on the size of the loan, so they want you to take the biggest loan possible and don't really care how you pay it back afterwards. – Vicky Aug 17 '13 at 8:36

This is relatively standard financial shell games, actually.

The same offers are often available when refinancing a house, but it just gets called "closing costs" or "document fees" so it feels a little bit different... also partly because the numbers FEEL bigger for a house and so ppl just sign on the line.

What's going on is that the lender has done its calculations and decided once upon a time that it would charge $299 to cover costs with loan refinances... No big deal. I trust that you're comfortable enough with reimbursing them for that.

As far as adding $1000 cash now!... and having you pay that back as the loan, they're doing some fancy financial calculations. If you want to see what that would basically cost to compare with an immediate $299 payment, you need to do some moderately complex financial calculations.

Here's a ballpark, but I'm making some assumptions that could get closer if you gave the new interest rate and the loan terms. Assuming you got a new loan for 13,000 at 3.5% for 5 years (60 months), your new payment would be about $236 per month. Check out bankrate.com's car payment calculator if you want to follow along.

That means that with your new loan you'd pay (60 * $236) + $299 = $14,459, if you went with the up front fee.

You'll pay back in principal 14,000 for the loan if you take the cash up front, which is $255/month or about $15,300. The obvious difference between the two is 15,300 - 14,460==840.

Now, how you evaluate it from here is up for debate and PhD thesis papers, but here's my two cents. You'll have to pay 299 either way to refinance your loan. So you're only really paying $540 extra to do the cash up front. Do you have the 299? It would save you money. Could you use the extra cash now? (And carry the higher payments?) Maybe the deal makes sense.

Its up to you. But I would be careful with respect to refinancing frequently, especially if you're at the first year(s) of the loan. The way that loan repayments work, you end up paying mostly interest up front and then start repaying your principal more and more towards the end. So you may feel like you're saving, due to the lower rates, when you're actually paying mostly interest perpetually without making a big dent in your loan balance.

  • Not sure I fully understand your last para. This would be true only if the tenor is more in the refinance. For example if the original tenor was 5 years, after one year if I refinance for a 3 years tenor ... its definately a saving. – Dheer Nov 6 '13 at 3:22
  • @Dheer, mathematically you are correct, but that assumes that there are no other costs associated with the refinance process – THEAO Nov 6 '13 at 7:37
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    I think you missed the point--I agree that the take an additional $1k is about folding the fee into the loan. He's considering immediately using that $1k to pay down the loan, at which point it costs nothing. The key issue here is whether the loan has prepayment penalties. – Loren Pechtel Jun 24 '14 at 23:03

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