EchoBay Expert: The interest on my current car loan is calculated as pre-computed not simple interest. Is an auto refinance loan a good decision?
Loyal Reader: If you have a pre-computed interest loan, it is generally not a good idea to get an auto refinance loan. With a pre-computed loan, you are obligated to pay all of the interest owed for the full term of the loan even if you refinance the next day.
Compare this to a simple interest loan where interest accrues on the balance of the loan. With a simple interest loan, the earlier you pay it off, the more money you save. This is not the case with pre-computed loans. The earlier you pay off a pre-computed loan, the larger the hit your wallet will take.
In all likelihood, your pre-computed loan also uses the rule of 78s. In this case, you are paying even more interest up front. If you decide to pay it off early, the lender will calculate a "rebate" but it's really just a charge.
With the rule of 78s, a majority of the interest is paid in the early part of the loan term, because of this you are making very small reductions in principal. This in turn equals a large payment for you when you want to refinance the loan.
If you have signed for a pre-computed loan, generally the best advice is to stick it out. When you buy a new vehicle, be sure you are signing a simple interest loan so you can avoid this headache next time.