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 mission is to help you make smarter financial decisions by offering interactive tools and financial calculators that provide objective and original content. We also allow you to conduct research and analyze data for free and help you make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are displayed on this site come from companies that pay us. This compensation could affect how and when products are featured on this website, for example for instance, the order in which they may be listed within the categories of listing, except where prohibited by law. This applies to our mortgage, home equity, and other home lending products. However, this compensation will affect the information we publish, or the reviews you read on this site. We do not cover the vast array of companies or financial offers that may be open to you. Getty Images - Eternity in an Instant
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan. personal and business finance contributor Kellye Guinan is an editor and writer on a freelance basis with over five years of experience in personal finance. She is also a full-time worker at her local library, helping her community access information about financial literacy, among other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing concise, well-researched and well-documented facts that break down complicated topics into bite-sized pieces. The Bankrate promise
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We receive compensation for the placement of sponsored products and, services, or when you click on certain hyperlinks on our website. This compensation could impact how, where and in what order items are listed and categories, unless it is prohibited by law. This is the case for our mortgage, home equity and other products for home loans. Other factors, like our own proprietary website rules and whether or not a product is available in your area or at your personal credit score may also influence the way and place products are listed on this website. Although we try to offer an array of offers, Bankrate does not include specific information on every credit or financial product or service. A penalty for late payments can keep you from saving money on interest. Many lenders have it -however, it is becoming more rare, however, you are able to request changes in the method by which payments are handled. Refinancing is also an option, but be prepared to pay a cost to cancel the current contract. What a prepayment clause is prepayment clauses define the time and manner in which the borrower is able to pay off the loan. Some may have an early payment penalty, an amount to be paid for repaying the loan early or making extra payments. This is most common for auto loans which have precomputed interest. You could be eligible for some sort of rebate or refund however it will not pay the entire amount of interest you paid. Prepayment penalties make it difficult to pay down the principal or . And if your loan is at a high interest rate, you'll end up paying a large amount to your lender and not be in a position to lower the principal. Because cars depreciate in value so the more you have to spend on interest and fees, the more likely to be . How prepayment clauses affect automobile loans The two main ways that prepayment clauses affect your . You might not be able to pay the principal down A prepayment clause may make it impossible to pay principal down. The extra amount goes toward your next payment. It could be useful in times of need by reducing the total amount you have to pay month-to-month, however you'll still have to pay a large amount of interest. Refinancing is more difficult A prepayment agreement could contain a prepayment penalty that could cause refinancing to be more costly than it's worth. But provided you'll save more on interest by switching to a different lender however, you might manage to break even. How do you stay clear of auto loan prepayment penalties It's possible to avoid prepayment penalties for the auto loan. However, the method of staying clear of them will depend on the goals you're trying to achieve. If you're looking for an loan Talk about penalties for early payment in conjunction with the lender. It is important to be upfront on the front. Many lenders, including banks and credit unions -- don't have prepayment clauses in their agreements. You can avoid a lot of headaches in the future by making sure you know this before you take out the loan. If you're considering refinancing Follow the same process when comparing new lenders. Compare options that don't enforce an obligation to pay in advance. Once you refinance, you'll be able to make the additional payments you want. Be aware of the costs associated with refinancing if the current loan has an early payment penalty. Utilize an application to determine whether refinancing is a good idea for your budget. Calculate the fee as part of the total loan amount to determine if it's worth refinancing. If you're happy with the terms of your loan negotiation to your present lender is an alternative in the event that you don't wish to refinance. You may request extra payments to be applied to the principal even if you have the prepayment clause. However, this isn't being guaranteed. Most lenders won't modify the terms of a loan contract without good reason. Keep in mind some lenders do not have prepayment clauses , but make additional payments to the interest first. Reach out to your lender and ask them to let the money be applied to the principal. If there's no prepayment clause that you can use, your lender must comply. The bottom line: Not all states have prepayment penalties , and no lender can charge one on more than 60 months. However, if your contract has one it is possible to work around it. Begin by contacting to your lender and asking for payments to be applied differently. If that doesn't work consider refinancing. Even with a prepayment penalty it is possible to save on interest for the duration of your auto loan. Learn more
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Written by personal and business financial contributor Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal financial planning. She also is an employee full-time at her local library where she helps 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 editing and writing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to take control of their finances through providing precise, well-researched and researched information that breaks down complicated subjects into bite-sized pieces.
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