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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 mission is to help you make better financial decisions by providing you with interactive financial calculators and tools as well as publishing impartial and unique content. This allows you to conduct research and analyze data for free and help you 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 products that are advertised on this website are provided by companies that pay us. This compensation can affect the way and where products appear on this website, for example for instance, the order in which they appear in the listing categories, except where prohibited by law. This applies to our loan products, such as mortgages and home equity, and other home loan products. However, this compensation will affect the content we publish or the reviews you see on this site. We do not cover the vast array of companies or financial offers that may be available to you. Eternity 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 freelance with more than five years of experience in personal financial planning. She also is a full-time worker at her local library, helping people in her 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 from late 2021. They are committed to helping readers gain confidence to take control of their finances through providing concise, well-researched and well-documented facts that break down complicated subjects into digestible pieces. The Bankrate guarantee
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Therefore, this compensation may influence the manner, place and in what order items appear in listing categories and categories, unless it is prohibited by law. This is the case for our mortgage home equity, mortgage and other products for home loans. Other factors, like our own proprietary website rules and whether a product is available in your region or within your own personal credit score can also impact the manner in which products appear on this website. While we strive to provide the most diverse selection of products, Bankrate does not include details about every credit or financial product or service. A penalty for late payments can keep you from saving interest. Many lenders have it — though it is becoming rarer — but you can request changes in the method by which payments are handled. Refinancing is also an option, however, you will need to pay a charge to end your current contract. What is a prepayment clause? Prepayment clauses specify how and when a borrower can pay off a loan. Some may have the prepayment penalty- a fee for paying off 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 you paid. Prepayment penalties make it difficult to settle the principal amount or . And if you’re loan has a high interest rate, you’ll end up paying a significant cost to your lender and not be in a position to lower the principal. Because cars depreciate in value and the more you spend on interest the more likely you are to be . What are the effects of prepayment clauses on automobile loans The two main ways that prepayment clauses affect your . You might not be able to pay the principal down. A prepayment provision could make it difficult to pay for the principal. Instead, that additional amount is used to pay for the next installment. It could be useful in times of need by reducing the total amount you owe month-to-month, but you’ll still have to pay an enormous sum of interest. Refinancing is more difficult A prepayment clause may include the possibility of a penalty for prepayment that can make refinancing more expensive that it’s actually worth. If you can save in interest rates with a new lender however, you might achieve a profit. How do you stay clear of auto loan prepayment penalties It’s possible to avoid penalties for prepayment on an auto loan. However, the method of getting rid of them is contingent on what you’re trying to accomplish. If you are seeking a loan Talk about penalties for early payment in conjunction with the lender. You should be aware of the penalties up front. Many lenders, such as credit unions and banksdo not have prepayment clauses in their agreements. You can steer clear of a lot of headaches in the future by making sure you know this before you take out the loan. If you’re planning to refinance use the same method when you compare lenders. Compare options that don’t enforce a prepayment clause. 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 your current loan is subject to prepayment penalties. Utilize an application to determine whether it’s a good fit for your budget. Calculate the fee as part of your new loan amount to decide if refinancing is worth it. If you’re content with the terms of your loan Negotiating to your present lender is an alternative if you do not want to refinance. It is possible to request additional payments be applied to the principal, even if there is a prepayment clause. However, this isn’t guarantee. Most lenders won’t alter a loan contract without justification. Keep in mind some lenders don’t have prepayment clauses but still make additional payments to the interest first. Reach out to your lender and ask them to let the money be put towards the principal. If there’s not a prepayment clause that you can use, your lender must comply. The bottom line is that not all states permit prepayment penalties — and there is no way that a lender is able to charge one for more than 60 months. But if your contract already has one, there are ways to get around it. Begin by contacting with 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 for the duration of your car loan. Find out more
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Written by Business and personal financial contributor Kellye Guinan is a freelance editor and writer who has more than 5 years experience working in the field of personal financial planning. She is also 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 writing and editing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to control their finances by providing concise, well-researched, and well-structured information that breaks down complicated subjects into bite-sized pieces.
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