Auto loan prepayment clauses: Why it's hard to pay down car loan interest early Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by offering you interactive tools and financial calculators that provide objective and original content. We also allow users to conduct studies and compare information for free and help you make informed financial decisions. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that are advertised on this site are from companies who pay us. This compensation could affect how and when products are featured on this website, for example such things as the order in which they appear within the listing categories, except where prohibited by law for our mortgage, home equity and other products for home loans. However, this compensation will affect the content we publish or the reviews appear on this website. We do not cover the entire universe of businesses or financial offers that may be available to you. Getty Images - Eternity in an Instant
2 min read Published June 30, 2022
Writer: Kellye Guinan. Personal and business finance writer Kellye Guinan is an editor and writer on a freelance basis with over five years of experience in personal financial planning. She is also an employee full-time at her local library, where she assists the community to access information on financial literacy, as well as other topics. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing clear, well-researched information that breaks down complicated topics into bite-sized pieces. The Bankrate guarantee
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We are compensated for the placement of sponsored products or services, or by you clicking on certain hyperlinks on our site. So, this compensation can affect the way, location and when products are listed and categories, unless it is prohibited by law for our mortgage home equity, mortgage and other products for home loans. Other factors, such as our own rules for our website and whether or not a product is available within your region or within your self-selected credit score range may also influence the way and place products are listed on this site. We strive to provide a wide range offers, Bankrate does not include information about each credit or financial item or product. Prepayment penalties can prevent you from saving money on interest. Many lenders have it -but it's getting more common, however, you are able to request modifications to the way payments are applied. Refinancing is also an option, however, you will need to pay a charge to end the current contract. What a prepayment clause is Prepayment clauses specify the time and manner in which the borrower may pay off a loan. Certain clauses may include the prepayment penalty- the cost of paying off a loan in advance or making additional payments. This is particularly prevalent with auto loans which have precomputed interest. You may be entitled to an amount of a rebate or a partial refund however it will not pay the entire amount of interest that you have paid. Prepayment penalties make it difficult to settle the principal or . In the event that the loan is at a high interest rate, you'll be paying a significant cost to your lender and not be able to reduce the principal. Since the value of cars decreases and the more you pay in interest and fees, the more likely you are to end up . How prepayment clauses affect the auto loans Two primary ways prepayment clauses impact your . It is possible that you will not be able pay principal down. A prepayment clause could make it difficult to pay the principal down. Instead, the additional amount is used to pay for your next monthly payment. It can help in the event of a crisis by reducing the total amount you pay monthly, but you'll still have to pay an enormous sum of interest. The process of refinancing can be more challenging. A prepayment clause may include an early payment penalty, which could make refinancing more expensive that it's actually worth. If you can save in interest rates with a new lender, you may still achieve a profit. How to get rid of prepayment penalties on auto loan prepayment penalties It's possible to avoid penalties for prepayment for an auto loan. But the exact process of avoiding them depends on what you're trying to accomplish. If you're in the market for the loan discuss penalties for prepayment with your lender. You want to be up on the front. Many lenders, such as credit unions and banks- don't have prepayment clauses included in their contracts. You can avoid a lot of hassles in the future by checking this before you take out the loan. If you're planning to refinance use the same method when comparing new lenders. Compare options that don't enforce a prepayment clause. If you decide to refinance, you'll be able to make any extra payments you'd like. But consider the costs of refinancing if the current loan has prepayment penalties. Utilize an application to determine whether refinancing is a good idea to your budget. Calculate the fee as part of the new loan amount to determine if refinancing is a good idea. If you're content with your loan negotiation the terms with your existing lender is an alternative in the event that you don't wish to refinance. You can request that additional payments be applied to the principal, even if you have the prepayment clause. However, this isn't being guaranteed. Most lenders won't alter a loan contract without justification. Be aware that some lenders don't have prepayment clauses but still make additional payments to the interest first. Reach out to your lender and ask them to let your funds be applied to the principal. If there's not a prepayment clause that you can use, your lender must comply. The bottom line is that not all states permit penalties for prepayment -- and no lender will charge one on an over 60-month contract. But if your contract already has one it is possible to get around it. Begin by communicating to your lender and asking for the payments to be used in a different way. If that doesn't work, consider refinancing. Even with a prepayment penalty it is possible to save money on interest throughout the term of your auto loan. Learn more
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Written by personal and business finance writer Kellye Guinan is a freelance editor and writer with more than five years ' experience within personal finance. She's also an employee full-time at her local library, helping the community gain access to information on financial literacy, in addition to other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances through providing precise, well-researched and researched information that dissects complicated subjects into bite-sized pieces.
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