 Figuring
out auto loan terms
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 Dear
Dr. Don,
How do I know if my auto loan is a simple interest loan or a precomputed
loan? I want to refinance my car, but don't know whether there is
a prepayment fee or not. What do I need to do in order to find out
whether there is a prepayment fee for my auto loan? If I ask my
financing company, they can lie and say no prepayment fee, but reality
is there is a prepayment fee and I don't know which one is true
... What do I need to do?
-- Rick Ride-Refi
 Dear
Rick,
The Bankrate feature, "Steer
clear of the perilous 'Rule of 78s'," explains how a precomputed
loan frontloads the interest expense in the early years of the loan
and acts as a prepayment penalty even if the loan doesn't have an
explicit prepayment penalty.
Reviewing the loan agreement can tell you how interest
is calculated on the loan and whether there is an explicit prepayment
penalty. Calling the lender and asking the question works, too,
but not if you're worried about them lying to you about it. You
can also look at Bankrate's auto payment calculator,
input the particulars of your auto loan and compare the balance
shown on the calculator's amortization schedule against the loan
balance shown on your monthly loan statement.
Refinancing an auto loan isn't always the right decision. Cars, as depreciating assets, often depreciate faster than you can pay down the loan balance. When the car's worth less than you owe, you're upside down in the loan. Refinancing becomes problematic because the loan isn't fully secured by the value of the car.
Even if you aren't upside down on the loan, with refinancing
you're always borrowing to finance a used vehicle, and rates on
used-car financing are typically higher than new-car financing rates.
Closing costs on the new loan, including the Department of Motor
Vehicles' charge for changing the lien holder on the vehicle, can
take away from any interest savings. A Bankrate feature, "Refinance
your auto loan," will help you through the decision process.
You can also use Bankrate's mortgage refinancing calculator
to help you decide if refinancing your car makes sense.
To ask a question of Dr. Don, go
to the "Ask the Experts"
page, and select one of these topics: "financing a home,"
"saving & investing" or "money."
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