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 smarter financial decisions by providing you with interactive financial calculators and tools as well as publishing impartial and unique content. This allows users to conduct research and compare information for free to help you 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 Earn money The products that are advertised on this website are provided by companies who pay us. This compensation can affect the way and where products appear on this site, including such things as the sequence in which they appear within the listing categories in the event that they are not permitted by law. Our mortgage, home equity, and other home loan products. This compensation, however, does have no impact on the information we provide, or the reviews that you read on this site. We do not contain the vast array of companies or financial offers that may be accessible to you. The eternal in an instant/Getty Images
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan. personal and business finance writer Kellye Guinan is an editor and writer freelance with more than five years of experience in personal finance. She is also a full-time worker at her local library, where she assists her community access information about financial literacy, among other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to manage their finances through providing precise, well-researched, and well-constructed information that breaks down complex topics into manageable bites. The Bankrate guarantee
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So, this compensation can impact how, where and in what order items appear within listing categories, except where prohibited by law. This is the case for our mortgage or home equity products, as well as other products for home loans. Other factors, such as our own website rules and whether the product is offered in your region or within your personal credit score can also impact the manner in which products appear on this website. While we strive to provide the most diverse selection of products, Bankrate does not include specific information on every financial or credit products or services. The penalties for prepayment can stop you from saving interest. Many lenders have it -however, it is becoming rarer -- however you can ask for modifications to the way payments are applied. You can also refinance but be prepared to pay a fee to cancel the current contract. What is a prepayment clause? prepayment clauses define the time and manner in which the borrower is able to pay off the loan. Certain clauses may include the prepayment penalty- a fee for paying off a loan early or making extra payments. This is especially common with auto loans which have precomputed interest. There is a possibility of a partial refund or rebate but it's not enough to cover the full amount of interest that you have paid. The penalty for early payment makes it difficult to reduce the principal amount . If the loan is a high-interest rate, you'll end up paying a significant amount to your lender and not be able to reduce the principal. Because cars depreciate in value and the more you pay in interest the more likely you are to be . How prepayment clauses affect auto loans Two main ways prepayment clauses impact your . You may not be able pay principal down A prepayment clause may make it impossible to pay the principal down. The extra amount is used to pay for your next payment. It could be useful in times of need by reducing the amount you owe month-to-month, but you'll still be paying an enormous amount of interest. Refinancing is more difficult A prepayment clause could include an early payment penalty, which could cause refinancing to be more costly that it's actually worth. But provided you'll save more in interest rates with a new lender and you're able to be able to make it work. How do you get rid of auto loan prepayment penalties It's possible to avoid penalties for prepayment on your auto loan. However, the precise method for getting rid of them is contingent on what you're trying for. If you're looking for an loan Discuss prepayment penalties in conjunction with the lender. You want to be up in the beginning. Many lenders, such as banks and credit unions -do not include prepayment clauses in their agreements. You can steer clear of a lot of future headaches by ensuring this before you take out an loan. If you're planning to refinance follow the same procedure when you compare lenders. Compare options that don't enforce an obligation to pay in advance. If you decide to refinance it, you'll be in a position to make the additional payments you'd like. But consider the costs of refinancing if the current loan has a prepayment penalty. Use an to see whether refinancing is a good idea to your budget. Consider the cost as part of the total loan amount to determine if refinancing is a good idea. If you're content with your loan negotiations the terms with your existing lender is also an option if you don't want to refinance. It is possible to request additional payments to be applied to the principal, even if there is an agreement to pay in advance. However, this isn't guaranteed. The majority of lenders will not alter a loan contract without justification. Take note that some lenders don't have prepayment provisions, but they will make additional payments to the interest first. Reach out to your lender and request that 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 the law states that no lender can charge one on more than 60 months. If your contract includes one, there are ways to get around it. Start by getting in touch the lender and asking them to allow payments to be used in a different way. If that doesn't work, think about refinancing. Even with a penalty for prepayment you could 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 financial writer Kellye Guinan is a freelance editor and writer who has more than five years of experience in personal finance. She is also employed full-time at the local library, where she assists people in her community get 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 dedicated to helping their readers gain the confidence to control their finances by providing precise, well-researched and researched information that breaks down otherwise complex topics into manageable bites.
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