||Ask Dr. Don
Payoff balance is higher than loan amount
Dear Dr. Don,
I recently purchased a new car. I made the mistake
of taking a loan from the dealership. I realized afterwards my interest
rate is 7.83 percent on a $15,000 loan. My payoff is $20,000. Will
it be advisable to refinance?
Without knowing your credit score, it's hard to determine if the
interest rate on your car loan is too high and if you would benefit
from refinancing. You can shop rates on Bankrate
and use Bankrate's auto loan calculator to compare the total interest expense on
your current loan with the interest expense on the new loan.
But something's not quite right here. For your loan payoff to be
more than the loan amount means that the loan has a big prepayment
penalty, a host of add-ins like credit life insurance, or both.
You need to review your loan document and speak to the lender about
how a $15,000 loan has a $20,000 payoff balance.
If you don't like his answers, you should talk to
the Federal Trade Commission and the lender's regulator. For national
banks, that's the Office of the Comptroller of the Currency. The
OCC has a guide
available online that can help you determine the appropriate
If you have to refinance $20,000 to repay $15,000,
it doesn't make sense to refinance. That's why you need to discuss
the payoff balance with the lender, and if his answers aren't satisfactory,
with the lender's regulators. At some point you may also want to
speak with an attorney.
-- Posted: May 21, 2004