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 smarter financial decisions by offering you interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct studies and analyze data for free to help you 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 products that are advertised on this site are from companies who pay us. This compensation may impact how and when products are featured on this site, including such things as the order in which they may appear in the listing categories and other categories, unless prohibited by law. This applies to our loan products, such as mortgages and home equity, and other home loan products. This compensation, however, does affect the information we provide, or the reviews that you see on this site. We do not cover the universe of companies or financial deals that could be accessible to you. Getty Images – Eternity in an Instant
2 min read Published June 30, 2022
Writer: Kellye Guinan. personal and Business Finance writer Kellye Guinan is an editor and writer freelance with more than five years of experience in personal financial planning. She is also an employee full-time at her local library, where she assists the community to access information on financial literacy, as well as other subjects. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to manage their finances through providing precise, well-researched, and well-constructed information that breaks down complex topics into manageable bites. The Bankrate promise
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We are compensated for the placement of sponsored products andservices or when you click on certain links posted on our site. Therefore, this compensation may affect the way, location and when products are listed and categories, unless it is prohibited by law. We also offer mortgage home equity, mortgage and other home loan products. Other factors, like our own rules for our website and whether or not a product is available in your area or at your own personal credit score may also influence the manner in which products appear on this website. We strive to provide an array of offers, Bankrate does not include information about every financial or credit product or service. Prepayment penalties can prevent you from saving money on interest. There are many lenders that have this — though it is becoming more rare, however, you are able to request changes in the method by which payments are applied. You can also refinance but you must be ready to pay a cost to cancel the current contract. What is a prepayment agreement? prepayment clauses define how and when a borrower can pay off the loan. Certain clauses may include a prepayment penalty — an amount to be paid for repaying the loan earlier or making additional payments. This is most common for auto loans that use precomputed interest. You could be eligible for some sort of rebate or refund however it will not pay the entire amount of interest that you have paid. Prepayment penalties make it difficult to settle the principal amount . And if your loan is a high-interest rate, you’ll end up paying a substantial amount to your lender and not be capable of reducing the amount. Since cars appreciate in value and the more you pay in interest and fees, the more likely you are to end up . Prepayment clauses impact automobile loans There are two major ways prepayment clauses impact your . You may not be able to pay principal down A prepayment clause could make it difficult to pay the principal down. Instead, that additional amount is used to pay for your next monthly payment. It could be useful in a pinch by lowering the amount that you have to pay month-to-month, however you’ll still be paying an enormous quantity of interest. Refinancing is more difficult A prepayment agreement could contain the possibility of a penalty for prepayment that can cause refinancing to be more costly as it is worth. If you can save on interest by switching to a different lender, you may still be able to make it work. How to get rid of prepayment penalties on auto loan prepayment penalties It’s possible to avoid prepayment penalties for the auto loan. But the exact process of getting rid of them is contingent on what you’re trying for. If you’re looking for a loan Talk about penalties for early payment in conjunction with the lender. It is important to be upfront front. A lot of lenders, such as credit unions and banksdo not include prepayment clauses included in their contracts. It is possible to avoid a number of future headaches by ensuring this before you take out a loan. If you’re planning to refinance use the same method when comparing new lenders. Compare the options that do not impose the prepayment clause. If you decide to refinance, you’ll be able to make any additional payments you’d like. Be aware of the costs associated with refinancing if your current loan is subject to an early payment penalty. Check out an online calculator to determine whether it’s a good fit in your budget. Consider the cost as part of your total loan amount to determine if it’s worth refinancing. If you’re satisfied with the terms of your loan negotiations the terms with your existing lender is an alternative in the event that you don’t wish to refinance. It is possible to request additional payments be applied to the principal, even if there is the prepayment clause. But this is far from guarantee. Most lenders won’t alter the terms of 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 ask that your money be transferred to the principal. If there’s no prepayment clause, your lender must comply. The bottom line is that not all states have prepayment penalties , and there is no way that a lender can charge one on an over 60-month contract. But if your contract already includes one, there are ways to work around it. Begin by communicating the lender and asking for the payments to be used in a different way. If that doesn’t work look into refinancing. Even with a penalty for prepayment it is possible to save money on interest over the life of your car loan. Learn more
Written by Business and personal finance Contributor Kellye Guinan is a freelance editor and writer who has more than five years ‘ experience within personal finance. She is also a full-time worker at her local library, where she assists the community gain access to information on financial literacy, among other subjects. The article was edited 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 control their finances with precise, well-researched and researched information that dissects complicated subjects into bite-sized pieces.
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