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 tools and financial calculators as well as publishing impartial and unique content. This allows users to conduct studies and analyze data for free - so that you can make sound financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site come from companies that pay us. This compensation can affect the way and where products appear on the site, such as for instance, the order in which they be listed within the categories of listing, except where prohibited by law. Our loan products, such as mortgages and home equity and other home lending products. However, this compensation will have no impact on the information we publish, or the reviews that you see on this site. We do not contain the universe of companies or financial offerings that might be available to you. The eternal in an instant/Getty Images
2 min read Published June 30, 2022
Writer: 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 financial planning. She is also a full-time worker at her local library where she helps the community to access information on financial literacy, as well as other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to take control of their finances by providing precise, well-researched, and well-constructed information that breaks down complicated topics into bite-sized pieces. The Bankrate promises
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We are compensated for placement of sponsored products or services, or through you clicking specific links on our website. Therefore, this compensation may impact how, where and when products appear in listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other elements, such as our own rules for our website and whether the product is available within your region or within your self-selected credit score range could also affect how and where products appear on this site. We strive to provide an array of offers, Bankrate does not include details about every financial or credit product or service. The penalties for prepayment can stop you from saving money on interest. A lot of lenders offer it- though it is becoming more rare, but you can request changes in the method by which payments are handled. Refinancing is also an option, but you must be ready to pay a charge to cancel your current contract. What is a prepayment clause? The prepayment clauses outline how and when the borrower is able to pay off the loan. There may be a prepayment penalty -- a fee for paying off a loan earlier or making additional payments. This is particularly prevalent with auto loans that use precomputed interest. You may be entitled to an amount of a rebate or a partial refund however it will not pay the entire amount of interest that you have paid. Prepayment penalties make it difficult to reduce the principal amount . If you're loan is a high-interest rate, you'll end up paying a large cost to your lender but not in a position to lower the principal. Because cars depreciate in value and the more you spend on interest and fees, the more likely you are to be . Prepayment clauses impact auto loans Two main ways prepayment clauses impact your . You might not be able to pay the principal down. A prepayment provision might make it difficult to pay the principal down. The extra amount will be used towards your next monthly payment. It can be helpful in a pinch by lowering the amount you have to pay month-to-month, however you'll still end up paying an enormous sum of interest. Refinancing is more difficult A prepayment clause may include a prepayment penalty that could cause refinancing to be more costly than it's worth. But provided you'll save more in interest rates with a new lender, you may still manage to break even. How to avoid prepayment penalties on auto loan prepayment penalties It is possible to avoid prepayment penalties on an auto loan. However, the precise method for staying clear of them will depend on the goals you're trying to accomplish. If you are in the market for a loan Discuss prepayment penalties and penalties with your lender. You should be aware of the penalties up on the front. Many lenders, including credit unions and banksdo not have prepayment clauses included in their contracts. You can steer clear of a lot of hassles in the future by checking this before you take out an loan. If you're considering refinancing Follow the same process when comparing new lenders. Compare options that don't enforce an obligation to pay in advance. After refinancing, you'll be able to make any extra payments you'd like. But consider the costs of refinancing if your current loan has an early payment penalty. Utilize an application 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 happy with your loan negotiation to your present lender is also an option if you don't want to refinance. You can request that additional payments to be applied to the principal even if you have an agreement to pay in advance. But this is far from guarantee. Most lenders won't modify a loan contract without good reason. Keep in mind some lenders do not have prepayment clauses but still require additional payments for interest first. Call your lender and ask them to let your funds be put towards the principal. If there's not a prepayment clause, your lender has to comply. The bottom line is that not all states permit prepayment penalties -- and the law states that no lender will charge one on more than 60 months. However, if your contract includes one it is possible to get around it. Start by getting in touch the lender and asking them to allow payments to be made in a different manner. If that doesn't work consider refinancing. Even with a prepayment penalty, you may be able to save money on interest throughout the term of your auto loan. Learn more
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Written by personal and business Finance writer Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finance. She is also employed full-time at the local library where she helps the community gain access to information on financial literacy, in addition to other topics. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances through providing precise, well-researched and researched information that breaks down otherwise complicated subjects into bite-sized pieces.
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