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 decisions by offering interactive financial calculators and tools that provide objective and original content. We also allow you to conduct research and compare data for no cost – so that you can make informed 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 offers that appear on this site are from companies that compensate us. This compensation could affect how and where products appear on the site, such as such things as the order in which they be listed within the categories of listing, except where prohibited by law for our loans, mortgages, and other products for home loans. This compensation, however, does have no impact on the information we publish, or the reviews that appear on this website. We do not contain the universe of companies or financial offers that may 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 a freelance editor and writer with over five years of experience in personal financial planning. She is also an employee full-time at her local library where she helps people in her community gain access to information on financial literacy, among other topics. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to manage their finances with clear, well-researched information that breaks down complex topics into manageable bites. The Bankrate promises
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So, this compensation can influence the manner, place and when products appear in listing categories in the event that they are not permitted by law. This is the case for our mortgage or home equity products, as well as other home loan products. Other factors, like our own website rules and whether a product is offered in your area or at your self-selected credit score range 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 specific information on each credit or financial product or service. The penalties for prepayment can stop you from saving interest. Many lenders have it -but it’s getting more common, however you can ask for changes to how the payments are made. You can also refinance however, you will need to pay a cost to end the current contract. What is a prepayment clause? Prepayment clauses specify how and when a borrower can pay off the loan. Certain clauses may include the prepayment penalty- a fee for paying off a loan in advance or making additional payments. This is particularly prevalent with auto loans that use precomputed interest. You could be eligible for an amount of a rebate or a partial refund however it will not pay the entire amount of interest you paid. Prepayment penalties make it difficult to reduce the principal amount . If your loan is a high-interest rate, you’ll end up paying a significant amount to your lender and not be capable of reducing the amount. Because cars depreciate in value so the more you have to pay in interest the more likely you are to be . Prepayment clauses impact auto loans The two primary ways that prepayment clauses affect your . It is possible that you will not be able to pay the principal down A prepayment clause might make it difficult to pay for the principal. Instead, the additional amount goes toward the next installment. It can be helpful in times of need by reducing the amount that you pay monthly, but you’ll still be paying an enormous quantity of interest. Refinancing is more difficult A prepayment clause may include a prepayment penalty that could result in refinancing costing more than it’s worth. If you can save in interest rates with a new lender and you’re able to achieve a profit. How do you stay clear of auto loan prepayment penalties It’s possible to avoid penalties for prepayment for the auto loan. But the exact process of getting rid of them is contingent on what you’re trying for. If you’re seeking an loan Talk about penalties for early payment and penalties with your lender. It is important to be upfront on the front. A lot of lenders, such as banks and credit unions -do not include prepayment clauses included in their contracts. You can steer clear of a lot of future headaches by ensuring this before you take out the loan. If you’re considering refinancing use the same method in comparing lenders. Compare alternatives that don’t impose an obligation to pay in advance. After refinancing, you’ll be able to make the additional payments you want. Be aware of the costs associated with refinancing if your current loan is subject to an early payment penalty. Utilize an application to determine if it makes sense for your budget. Consider the cost as part of the new loan amount to determine if refinancing is a good idea. If you’re content with the terms of your loan Negotiating to your present lender is also an alternative in the event that you don’t wish to refinance. You can request that additional payments be applied to the principal even if you have the prepayment clause. However, this isn’t guaranteed. Most lenders won’t modify a loan contract without a valid reason. Take note that some lenders don’t have prepayment clauses , but require additional payments for interest first. Contact your lender and request that your funds be applied to the principal. If there’s no prepayment clause that you can use, your lender has to comply. The bottom line Not all states allow prepayment penalties — and there is no way that a lender will charge one on an over 60-month contract. If your contract has one, there are ways to overcome it. Begin by contacting to your lender and asking for the payments to be used in a different way. If this doesn’t work, think about refinancing. Even with a prepayment penalty it is possible to save on interest over the life of your car 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 is also an employee full-time at her local library, where she assists the community gain access to information on financial literacy, in addition to other subjects. 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 passionate about helping readers feel confident to manage their finances by providing concise, well-researched, and well-structured information that breaks down complicated topics into digestible pieces.
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