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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?
Vincent Vehicle

Dear Vincent,
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.

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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 regulator.

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

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See Also
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