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 smarter financial decisions by offering interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct research and analyze data for free - so that you can make sound financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site come from companies that compensate us. This compensation could affect how and where products appear on this site, including such things as the order in which they may be listed within the categories of listing in the event that they are not permitted by law for our loans, mortgages,, and other home lending products. However, this compensation will not influence the information we publish, or the reviews that you see on this site. We do not cover the entire universe of businesses or financial offers that may be open to you. Eternity in an Instant/Getty Images
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan Written by personal and business finance Contributor Kellye Guinan is a freelance editor and writer with more than five years' experience in personal financial planning. She is also a full-time worker at her local library, where she assists the community to access information on financial literacy, as well as other subjects. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances with clear, well-researched information that breaks down complicated subjects into digestible pieces. The Bankrate guarantee
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We receive compensation for the placement of sponsored products or services, or when you click on specific links on our website. So, this compensation can impact how, where and when products appear within listing categories and categories, unless it is prohibited by law. We also offer mortgage, home equity and other home loan products. Other factors, such as our own website rules and whether a product is available in the area you reside in or is within your personal credit score can also impact how and where products appear on this website. While we strive to provide an array of offers, Bankrate does not include specific information on every financial or credit item or product. A penalty for late payments can keep you from saving interest. A lot of lenders offer itbut it's becoming more rare, but you can request modifications to the way payments are handled. Refinancing is also an option, but you must be ready to pay a charge to cancel the current contract. What is a prepayment agreement? Prepayment clauses specify how and when the borrower is able to pay off a loan. Some may have the prepayment penalty- a fee for paying off a loan early or making extra payments. This is particularly prevalent with auto loans which have precomputed interest. You could be eligible for an amount of a rebate or a partial refund but it's not enough to be enough to cover the total amount of interest you paid. The penalties for prepayment make it hard to reduce the principal amount . If your loan is at a high interest rate, you'll be paying a substantial sum to the lender and not be able to reduce the principal. Since cars appreciate in value, the more you spend on interest and fees, the more likely to end up . How prepayment clauses affect the auto loans The two major ways that prepayment clauses affect your . You may not be able to pay the principal down A prepayment clause might make it difficult to pay principal down. The extra amount goes toward the next installment. It can be helpful in the event of a crisis by reducing the total amount you owe month-to-month, but you'll still have to pay an quantity of interest. Refinancing is more difficult A prepayment clause may include an early payment penalty, which could result in refinancing costing more that it's actually worth. If you can save in interest rates with a new lender, you may still be able to make it work. How to get rid of prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment on the auto loan. However, the precise method for avoiding them depends on what you're trying for. If you are in the market for a loan discuss penalties for prepayment with your lender. You should be aware of the penalties up on the front. Plenty of lenders -- including banks and credit unions -do not have prepayment clauses in their agreements. You can avoid a lot of headaches in the future by making sure you know this prior to taking out a loan. If you're looking to refinance Follow the same process in comparing lenders. Compare options that don't enforce the prepayment clause. After refinancing, you'll be able to make any extra payments you'd like. However, you should consider the cost of refinancing if the current loan is subject to a prepayment penalty. Check out an online calculator to determine whether refinancing is a good idea to your budget. Calculate the fee as part of the total loan amount to determine if it's worth refinancing. If you're satisfied with your loan Negotiating to your present lender can be a viable 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 an agreement to pay in advance. However, this isn't being guaranteed. Most lenders won't modify the terms of a loan contract without good reason. Take note that certain lenders don't have prepayment provisions, but they will require additional payments for interest first. Reach out to your lender and request that your funds be applied to the principal. If there's no prepayment clause, your lender has to comply. The bottom line: Not all states permit penalties for prepayment -- and the law states that no lender can charge one on a over 60 months. If your contract has one it is possible to get around it. Begin by contacting to your lender and asking for payments to be applied differently. If that doesn't work think about refinancing. Even with a prepayment penalty, you may be able to save on interest throughout the term of your auto loan. Find out more
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Written by Personal and business finance writer Kellye Guinan is a freelance editor and writer with over five years ' experience within personal financial planning. She's also employed full-time at the local library where she helps people in her community get information on financial literacy, among other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers gain the confidence to manage their finances through providing precise, well-researched and researched information that dissects complicated topics into digestible pieces.
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