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 better financial choices by offering you interactive tools and financial calculators as well as publishing impartial and unique content. We also allow users to conduct studies and compare data for no cost - so that you can make financial decisions with confidence. 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 site come from companies who pay us. This compensation can affect the way and where products appear on this website, for example, for example, the order in which they appear within the listing categories and other categories, unless prohibited by law for our loan products, such as mortgages and home equity, and other home loan products. However, this compensation will not influence the information we provide, or the reviews that appear on this website. We do not include the entire universe of businesses or financial offers that may be open to you. The eternal in an instant/Getty Images
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan Written by Personal and business finance writer Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finance. She is also an employee full-time at her local library, helping 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 since late 2021. They are dedicated to helping readers gain the confidence to control their finances with concise, well-researched and well-documented information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate promises
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We receive compensation for placement of sponsored products and, services, or by you clicking on certain hyperlinks on our website. This compensation could impact how, where and when products appear in listing categories, except where prohibited by law. We also offer mortgage home equity, mortgage and other home loan products. Other factors, like our own rules for our website and whether a product is offered in your area or at your self-selected credit score range could also affect how and where products appear on this site. Although we try to offer an array of offers, Bankrate does not include details about every credit or financial product or service. The penalties for prepayment can stop you from saving money on interest. A lot of lenders offer it- though it is getting more common, however you can ask for modifications to the way the payments are made. You can also refinance however, you will need to pay a charge to cancel your current contract. What a prepayment clause is Prepayment clauses specify the time and manner in which a borrower can pay off a loan. Some may have a prepayment penalty -- an amount to be paid for repaying the loan early or making extra payments. This is especially common with auto loans which have precomputed interest. You may be entitled to some sort of rebate or refund however it will not be enough to cover the total amount of interest that you have paid. The penalties for prepayment make it hard to reduce the principal amount . If the loan is a high-interest rate, you'll end up paying a substantial sum to the lender but not capable of reducing the amount. Since the value of cars decreases and the more you pay in interest, the more likely to be . What are the effects of prepayment clauses on the auto loans There are two main ways that prepayment clauses affect your . You may not be able to pay the principal down. A prepayment provision may make it impossible to pay principal down. The extra amount goes toward your next payment. It can help in the event of a crisis by reducing the total amount you pay monthly, but you'll still be paying a large quantity of interest. The process of refinancing can be more challenging. A prepayment agreement could contain an early payment penalty, which could make refinancing more expensive that it's actually worth. However, if you save on interest with a new lender however, you might be able to make it work. How do you avoid auto loan prepayment penalties It is possible to avoid prepayment penalties for your auto loan. However, the precise method for staying clear of them will depend on the goals you're trying to achieve. If you're looking for the loan Discuss prepayment penalties with your lender. You want to be up front. A lot of lenders -- including credit unions and banksdo not include prepayment clauses included in their contracts. It is possible to avoid a number of hassles in the future by checking this prior to taking out a loan. If you're planning to refinance follow the same procedure when you compare lenders. Compare options that don't enforce a 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 for your budget. Consider the cost as part of your current loan amount to determine if refinancing is a good idea. If you're happy with your loan Negotiating with your current lender is also an alternative if you do not want to refinance. You may request extra payments to be applied to the principal, even if there is the prepayment clause. But this is far from guaranteed. The majority of lenders will not alter an loan contract without justification. Be aware that some lenders do not have prepayment clauses but still apply additional payments to interest first. Reach out to your lender and ask them to let your money be transferred to the principal. If there's no prepayment provision, your lender must comply. The bottom line Not all states allow penalties for prepayment -- and the law states that no lender is able to charge one for a over 60 months. If your contract includes one you can work around it. Begin by contacting to your lender and asking for the payments to be applied differently. If that doesn't work think about refinancing. Even with a prepayment penalty you could be able to save money 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 with more than 5 years experience working in the field of personal financial planning. She also is employed full-time at the local library, helping the community gain access to information on financial literacy, in addition to 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 to take control of their finances by providing precise, well-researched and researched information that dissects complicated subjects into bite-sized pieces.
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