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 financial calculators and tools as well as publishing impartial and unique content. This allows you to conduct research and compare data for no cost 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 Make money The products that are advertised on this website are provided by companies that pay us. This compensation could affect how and when products are featured on this site, including, for example, the sequence in which they appear in the listing categories, except where prohibited by law. This applies to our mortgage, home equity and other home lending products. This compensation, however, does have no impact on the information we provide, or the reviews that appear on this website. We do not contain the entire universe of businesses or financial offerings that might be accessible to you. The eternal in an instant/Getty Images
2 min read Published June 30, 2022
Writer: Kellye Guinan Written by Personal and Business Finance contributor Kellye Guinan is an editor and writer freelance with more than five years of experience in personal finance. She also is a full-time worker at her local library where she helps her community access information about financial literacy, among other subjects. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to control their finances with clear, well-researched information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate guarantee
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We are compensated in exchange for the promotion of sponsored goods and, services, or through you clicking certain links posted on our site. So, this compensation can affect the way, location and in what order products appear within listing categories in the event that they are not permitted by law for our mortgage home equity, mortgage and other home loan products. Other elements, such as our own website rules and whether the product is available within the area you reside in or is within your own personal credit score can also impact how and where products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include details about every credit or financial products or services. The penalties for prepayment can stop you from saving money on interest. A lot of lenders offer itbut it's becoming more rare, however you can ask for changes in the method by which payments are applied. Refinancing is also an option, however, you will need to pay a fee to end your current contract. What is a prepayment agreement? prepayment clauses define the time and manner in which the borrower may pay off a loan. Some may have an early payment penalty, the cost of paying off the loan earlier or making additional payments. This is especially common with auto loans which use precalculated interest. You could be eligible for an amount of a rebate or a partial refund however it will not be enough to cover the total amount of interest you paid. Prepayment penalties make it difficult to settle the principal amount or . And if your loan is a high-interest rate, you'll end up paying a substantial sum to the lender and not be capable of reducing the amount. Because cars depreciate in value so the more you have to spend on interest, the more likely to be . What are the effects of prepayment clauses on automobile loans There are two main ways prepayment clauses impact your . You might not be able to pay the principal down. A prepayment provision could make it difficult to pay the principal down. Instead, that additional amount goes toward the next installment. It can help in times of need by reducing the amount that you pay monthly, but you'll still be paying an enormous sum of interest. Refinancing can be more difficult prepayment clause may include an early payment penalty, which could result in refinancing costing more that it's actually worth. However, if you save on interest by switching to a different lender and you're able to manage to break even. How do you get rid of auto loan prepayment penalties It is possible to avoid prepayment penalties on the auto loan. However, the method of avoiding them depends on what you're trying to achieve. If you're looking for the loan Discuss prepayment penalties and penalties with your lender. It is important to be upfront front. Many lenders -- including banks and credit unions -do not include prepayment clauses in their agreements. You can avoid a lot of hassles in the future by checking this before you take out a loan. If you're planning to refinance Follow the same process in comparing lenders. Compare the options that do not impose a prepayment clause. Once you refinance you'll be able to make the additional payments you'd like. Be aware of the costs associated with refinancing if the current loan has a prepayment penalty. Check out an online calculator to determine if it makes sense to your budget. Consider the cost as part of your current loan amount to determine if it's worth refinancing. If you're happy with your loan Negotiating to your present lender can be a viable option if you don't want to refinance. It is possible to request additional payments to be applied to the principal even if you have the prepayment clause. However, this isn't guaranteed. Most lenders won't alter an loan contract without justification. Take note that some lenders do not have prepayment provisions, but they will require additional payments for interest first. Call your lender and ask that the money be applied to the principal. If there's no prepayment provision that you can use, your lender is required to adhere. The bottom line: Not all states allow penalties for prepayment -- and no lender will charge one on a over 60 months. But if your contract already has one you can work around it. Begin by contacting the lender and asking for the payments to be used in a different way. If this doesn't work, look into refinancing. Even with a prepayment penalty, you may be able to save on interest throughout the term of your auto loan. Learn more
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Written by personal and business Finance Contributor Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finance. She also is an employee full-time at her local library where she helps the community gain access to information on financial literacy, as well as other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers feel confident to manage their finances through providing concise, well-researched, and well-structured information that dissects complicated topics into digestible pieces.
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