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 offering interactive financial calculators and tools that provide objective and original 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 such as, 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 come from companies who pay us. This compensation may impact how and when products are featured on the site, such as for instance, the sequence in which they appear in the listing categories, except where prohibited by law. Our loans, mortgages,, and other products for home loans. But this compensation does have no impact on the information we publish, or the reviews you see on this site. We do not include the vast array of companies or financial offerings that might 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 writer Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial planning. She is also a full-time worker at her local library, where she assists the community to access information on financial literacy, as well as other topics. 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 gain the confidence to take control of their finances with concise, well-researched and well-documented facts that break down complex topics into manageable bites. The Bankrate promises
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We receive compensation for the promotion of sponsored goods and, services, or when you click on certain links posted on our website. This compensation could affect the way, location and when products appear within listing categories and categories, unless it is prohibited by law. We also offer mortgage, home equity and other home lending products. Other factors, like our own website rules and whether a product is offered in the area you reside in or is within your own personal credit score could also affect how and where products appear on this website. Although we try to offer the most diverse selection of products, Bankrate does not include information about every credit or financial products or services. Prepayment penalties can prevent you from saving money on interest. Many lenders have it — though it is getting more common, but you can request modifications to the way payments are handled. You may also refinance, but you must be ready to pay a cost to get out of the current contract. What a prepayment clause is prepayment clauses define the time and manner in which the borrower is able to pay off a loan. Certain clauses may include a prepayment penalty — an amount to be paid for repaying the loan early or making extra payments. This is most common for auto loans which have precomputed interest. You could be eligible for a partial refund or rebate however it will not pay the entire amount of interest you paid. Prepayment penalties make it difficult to settle the principal amount . And if the loan is a high-interest rate, you’ll be paying a large amount to your lender without being capable of reducing the amount. Since the value of cars decreases so the more you have to pay in interest, the more likely you are to be . How prepayment clauses affect auto loans Two major ways in which prepayment clauses can affect your . It is possible that you will not be able to pay the principal down. A prepayment clause could make it difficult to pay principal down. Instead, the additional amount will be used towards your next monthly payment. It can be helpful 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 quantity of interest. Refinancing can be more difficult prepayment agreement could contain a prepayment penalty that could result in refinancing costing more that it’s actually worth. If you can save on interest by switching to a different lender, you may still achieve a profit. How to avoid prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment on an auto loan. But the exact process of avoiding them depends on what you’re trying for. If you’re looking for an loan discuss penalties for prepayment in conjunction with the lender. You should be aware of the penalties up on the front. Plenty of lenders — including banks and credit unions -do 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 looking to refinance use the same method 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 extra payments you want. But consider the costs of refinancing if the current loan has prepayment penalties. Check out an online calculator to determine if it makes sense for your budget. Consider the cost as part of your new loan amount to decide if refinancing is worth it. If you’re happy with the terms of your loan negotiation with your current lender can be a viable alternative if you do not want to refinance. It is possible to request additional installments to be applied to your principal, even if you have an agreement to pay in advance. But this is far from guaranteed. The majority of lenders will not alter an loan contract without good reason. Be aware that certain lenders don’t have prepayment clauses , but apply additional payments to interest first. Reach out to your lender and ask them to let the money be transferred to the principal. If there’s no prepayment provision in place, your lender is required to adhere. The bottom line: Not all states have prepayment penalties , and there is no way that a lender will charge one on more than 60 months. But if your contract already has one, there are ways to get around it. Start by getting in touch the lender and asking for payments to be made in a different manner. If this doesn’t work, consider refinancing. Even with a penalty for prepayment, you may be able to save on interest over the life of your car 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 financial planning. She also is a full-time worker at her local library where she helps people in her community get information on financial literacy, in addition to other subjects. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping their readers feel confident to take control of their finances with concise, well-researched, and well-structured information that dissects complicated topics into digestible pieces.
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