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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 smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. We also allow users to conduct research and compare information for free — so that you can make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this website are provided by companies who pay us. This compensation may impact how and where products appear on this site, including such things as the order in which they may appear within the listing categories and other categories, unless prohibited by law. Our loans, mortgages, and other products for home loans. However, this compensation will affect the content we publish or the reviews appear on this website. We do not contain 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
Writer: Kellye Guinan. Personal and business finance Contributor Kellye Guinan is an editor and writer freelance with over five years of experience in personal finance. She is also employed full-time at the 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 since late 2021. They are dedicated to helping readers gain the confidence to manage their finances by providing precise, well-researched, and well-constructed information that breaks down complicated topics into bite-sized pieces. The Bankrate guarantee
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We are compensated in exchange for the placement of sponsored products andservices or by you clicking on specific links on our website. This compensation could affect the way, location and in what order items appear within listing categories and categories, unless it is prohibited by law for our mortgage or home equity products, as well as other products for home loans. Other elements, such as our own website rules and whether a product is available within your region or within your self-selected credit score range can also impact the manner in which products appear on this site. Although we try to offer an array of offers, Bankrate does not include details about every credit or financial item or product. Prepayment penalties can prevent 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 charge to end the current contract. What a prepayment clause is The prepayment clauses outline how and when a borrower can pay off the loan. There may be an early payment penalty, the cost of paying off the loan earlier or making additional payments. This is particularly prevalent with auto loans which use precalculated interest. You could be eligible for an amount of a rebate or a partial 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 . And if your loan is at a high interest rate, you’ll be paying a substantial cost to your lender without being in a position to lower the principal. Since the value of cars decreases and the more you spend on interest the more likely you are to be . How prepayment clauses affect the auto loans There are two main ways that prepayment clauses 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 the next installment. It can be helpful in the event of a crisis by reducing the amount that you pay monthly, but you’ll still have to pay an enormous sum of interest. The process of refinancing can be more challenging. A prepayment clause could include an early payment penalty, which could cause refinancing to be more costly 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 stay clear of auto loan prepayment penalties It is possible to avoid penalties for prepayment for the auto loan. However, the precise method for staying clear of them will depend on the goals you’re trying for. If you’re seeking a loan Discuss prepayment penalties and penalties with your lender. You want to be up on the front. A lot of lenders — including banks and credit unions — don’t have prepayment clauses in their agreements. You can avoid a lot of future headaches by ensuring this before you take out the loan. If you’re looking to refinance follow the same procedure when comparing new lenders. Compare options that don’t enforce a prepayment clause. Once you refinance you’ll be able to make the additional payments you’d like. Be aware of the costs associated with refinancing if your current loan has a prepayment penalty. Utilize an application to determine whether refinancing is a good idea to your budget. Calculate the fee as part of your total loan amount to determine if refinancing is a good idea. If you’re happy with your loan negotiations to your present lender is an alternative if you do not want to refinance. You may request extra payments be applied to the principal, even if you have the prepayment clause. However, this isn’t guarantee. Most lenders won’t modify an loan contract without good reason. Keep in mind some lenders do not have prepayment clauses , but require additional payments for interest first. Call your lender and request that the money be put towards the principal. If there’s no prepayment clause in place, your lender must comply. The bottom line Not all states have prepayment penalties — and there is no way that a lender can charge one on more than 60 months. However, if your contract includes one, there are ways to work around it. Begin by communicating to your lender and asking for the payments to be applied differently. If that doesn’t work, look into refinancing. Even with a penalty for prepayment, you may be able to save on interest over the life of your car loan. Learn more
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Written by personal and business financial contributor Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal finance. She’s also employed full-time at the local library where she helps 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 writing and editing for Bankrate since late 2021. They are committed to helping readers gain the confidence to control their finances through providing precise, well-researched and researched information that dissects complex topics into manageable bites.
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