When you are applying for a car loan, the loan amount will include the appropriate taxes for the vehicle, the accumulated interest or "cost of borrowing" for the vehicle. All these costs will add up to a total amount that will be financed over a determined term. It is no surprise when you are trying to break the loan in its early stages you will face these penalties when you attempt to break the contract.
Open ended loans is a loan that can be paid off any time without additional interest penalties from the manufacture. Which means if you have means to pay off your 60 month car loan in 32 you will not face any additional interest charges. Close ended loans means you must pay the interest promised to the lender regardless if you pay off the loan earlier than the loan term. It is usually more costly to terminate a close ended car loan versus an open end one.
It is no surprise when you are breaking your financial contract early you will have to pay the penalty which is also known as "negative equity". To re-finance the previous debt attached to your car again in a new loan is illegal in Canada. But due to change of your life style or living situation some one may be forced into refinance the old debt. To hide the negative equity that is less than 10% of the purchasing price of your new vehicle is not difficult to obtain. Many dealers today will simply turn a blind eye just to have your business. But when the amount is noticeable by the bank it is lot harder to deal with and it will take a lot more creative thinking to get you approved. Many dealers may sell you added options that are purely for the purpose of hiding this bad debt.
The point you should take away from this article is to try to avoid negative equity at all cost possible, because this phenomena if not treated carefully can have you buried with financial burden that will be hard to clean up. If you are currently carrying negative equity in your car loan, one should wait until the debt is completely paid off before venturing into a new loan. Nothing can be worse than compounded debt on a depreciating asset with high interest rates, so the next time you are trying to finance a vehicle you should avoid taking on re-financing a car loan all together if possible.