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 choices by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling users to conduct research and compare information for free - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that are advertised on this site are from companies that pay us. This compensation may impact how and when products are featured on this website, for example such things as the order in which they may be listed within the categories of listing, except where prohibited by law for our mortgage, home equity, and other products for home loans. This compensation, however, does not influence the information we publish, or the reviews appear on this website. We do not include the vast array of companies or financial deals that could be accessible 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 contributor Kellye Guinan is an editor and writer on a freelance basis with over five years of experience in personal finance. She also is an employee full-time at her local library, where she assists the community to access 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 from late 2021. They are dedicated to helping readers gain the confidence to manage their finances by providing clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces. The Bankrate promises
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Therefore, this compensation may impact how, where and when products are listed, except where prohibited by law for our mortgage, home equity and other home loan products. Other factors, such as our own website rules and whether the product is available in the area you reside in or is within your own personal credit score may also influence how and where products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include information about every financial or credit product or service. A penalty for late payments can keep you from saving interest. There are many lenders that have this -- though it is becoming rarer -- however, you are able to request modifications to the way the payments are made. Refinancing is also an option, however, you will need to pay a charge to get out of your current contract. What is a prepayment agreement? Prepayment clauses specify how and when the borrower is able to pay off a loan. There may be the prepayment penalty- the cost of paying off the loan earlier or making additional payments. This is particularly prevalent with auto loans that use precomputed interest. You may be entitled to a partial refund or rebate but it's not enough to pay the entire amount of interest you paid. The penalties for prepayment make it hard to pay down the principal amount . In the event that your loan is at a high interest rate, you'll end up 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 the more likely to end up . Prepayment clauses impact the auto loans Two main ways that prepayment clauses affect your . It is possible that you will not be able to pay principal down. A prepayment clause may make it impossible to pay principal down. The extra amount will be used towards your next payment. It can help in the event of a crisis by reducing the amount that you pay monthly, but you'll still be paying a large quantity of interest. Refinancing is more difficult A prepayment agreement could contain a prepayment penalty that could make refinancing more expensive that it's actually worth. However, if you save in interest rates with a new lender however, you might manage to break even. How do you avoid auto loan prepayment penalties It's possible to avoid prepayment penalties for your auto loan. But the exact process of staying clear of them will depend on the goals you're trying to accomplish. If you are in the market for the loan Talk about penalties for early payment with your lender. It is important to be upfront front. A lot of lenders, including banks and credit unions -do not include prepayment clauses in their contracts. You can steer clear of a lot of future headaches by ensuring that you have this clause in place prior to taking out an loan. If you're considering refinancing Follow the same process 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 any additional payments you want. However, you should consider the cost of refinancing if the current loan is subject to an early payment penalty. Check out an online calculator to determine whether it's a good fit in your budget. Calculate the cost as a percentage of your total loan amount to determine if refinancing is a good idea. If you're content with the terms of your loan negotiations the terms with your existing lender can be a viable alternative if you do not want to refinance. You may request extra payments to be applied to the principal even if you have a prepayment clause. However, this isn't guaranteed. The majority of lenders will not alter an loan contract without justification. Keep in mind certain lenders don't have prepayment provisions, but they will make additional payments to the interest first. Reach out to your lender and ask that the money be transferred to the principal. If there's no prepayment provision that you can use, your lender has to comply. The bottom line is that not all states allow penalties for prepayment -- and no lender can charge one on an over 60-month contract. If your contract has one it is possible to work around it. Start by getting in touch the lender and asking for the payments to be used in a different way. If that doesn't work look into refinancing. Even with a penalty for prepayment, you may be able to save money on interest throughout the term of your car loan. Find out more
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Written by Personal and business Finance Contributor Kellye Guinan is a freelance editor and writer who has more than five years of experience in personal financial planning. She's also a full-time worker at her local library, helping the community gain access to information on financial literacy, among other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers feel confident to manage their finances with clear, well-researched information that breaks down complicated topics into digestible pieces.
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