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 goal is to help you make better financial decisions by providing you with interactive tools and financial calculators as well as publishing impartial and unique content. We also allow users to conduct research and compare data for no cost - so that you can 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 products that are advertised on this site come from companies that compensate us. This compensation may impact how and when products are featured on this site, including such things as the order in which they appear within the listing categories, except where prohibited by law. Our loan products, such as mortgages and home equity, and other products for home loans. This compensation, however, does have no impact on the information we provide, or the reviews you read on this site. We do not contain the vast array of companies or financial offerings that might be open to you. Getty Images - Eternity in an Instant
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan Written by personal and Business Finance Contributor Kellye Guinan is an editor and writer freelance with more than five years' experience in personal finance. She is also a full-time worker at her local library where she helps her community access information about financial literacy, in addition to other topics. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to control their finances with concise, well-researched and well-documented facts that break down complicated subjects into digestible pieces. The Bankrate guarantee
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So, this compensation can influence the manner, place and when products are listed and categories, unless it is prohibited by law. This is the case for our mortgage home equity, mortgage and other products for home loans. Other factors, such as our own proprietary website rules and whether or not a product is available within your region or within your personal credit score may also influence the way and place products are listed on this website. While we strive to provide an array of offers, Bankrate does not include information about each credit or financial products or services. Prepayment penalties can prevent you from saving money on interest. A lot of lenders offer itbut it's becoming rarer -- however, you are able to request changes in the method by which the payments are made. Refinancing is also an option, but be prepared to pay a fee to get out of the current contract. What a prepayment clause is The prepayment clauses outline the time and manner in which the borrower may pay off a loan. There may be an early payment penalty, a fee for paying off a loan in advance or making additional payments. This is particularly prevalent with auto loans which use precalculated interest. There is a possibility of some sort of rebate or refund but it's not enough to be enough to cover the total amount of interest you paid. The penalty for early payment makes it difficult to pay down the principal or . In the event that the loan has a high interest rate, you'll be paying a substantial amount to your lender and not be in a position to lower the principal. Since the value of cars decreases and the more you pay in interest and fees, the more likely to be . What are the effects of prepayment clauses on auto loans There are two primary ways in which prepayment clauses can affect your . You might not be able pay principal down A prepayment clause may make it impossible to pay the principal down. Instead, the additional amount will be used towards your next payment. It can help in the event of a crisis by reducing the amount that you have to pay month-to-month, however you'll still have to pay an enormous sum of interest. Refinancing is more difficult A prepayment clause could include an early payment penalty, which could cause refinancing to be more costly than it's worth. If you can save in interest rates with a new lender and you're able to achieve a profit. How to stay clear of prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment on your auto loan. However, the precise method for avoiding them depends on what you're trying to achieve. If you're looking for a loan Talk about penalties for early payment and penalties with your lender. You want to be up front. Many lenders, including banks and credit unions -- don't have prepayment clauses included in their contracts. You can avoid a lot of headaches in the future by making sure you know that you have this clause in place prior to taking out the loan. If you're looking to refinance Follow the same process when comparing new lenders. Compare the options that do not impose a prepayment clause. If you decide to refinance, you'll be able to make any additional payments you want. However, you should consider the cost of refinancing if your current loan is subject to prepayment penalties. Utilize an application to determine whether refinancing is a good idea to your budget. Calculate the fee as part of your current loan amount to determine if it's worth refinancing. If you're happy with your loan Negotiating with your current lender can be a viable alternative if you do not want to refinance. You can request that additional payments to be applied to the principal, even if you have the prepayment clause. But this is far from being guaranteed. The majority of lenders will not 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 them to let your funds be transferred to the principal. If there's no prepayment clause, your lender must comply. The bottom line is that not all states permit penalties for prepayment -- and no lender is able to charge one for a over 60 months. However, if your contract has one, there are ways to overcome it. Begin by communicating to your lender and asking them to allow payments to be made in a different manner. If that doesn't work think about refinancing. Even with a prepayment penalty, you may be able to save money 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 more than five years of experience in personal financial planning. She also is a full-time worker at her local library, where she assists people in her community get information on financial literacy, as well as other topics. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers to control their finances with precise, well-researched and researched information that breaks down otherwise complicated subjects into bite-sized pieces.
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