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 providing you with interactive tools and financial calculators that provide objective and original content, by enabling users to conduct research and compare information for free to help you make financial decisions with confidence. 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 site come from companies that compensate us. This compensation may impact how and where products appear on this website, for example, for example, the order in which they appear in the listing categories in the event that they are not permitted by law. This applies to our loans, mortgages,, and other products for home loans. However, this compensation will have no impact on the information we provide, or the reviews you read on this site. We do not contain the entire universe of businesses or financial deals that could be accessible 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 writer Kellye Guinan is an editor and writer on a freelance basis with over five years of experience in personal financial planning. She is also employed full-time at the local library where she helps 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 writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances with precise, well-researched, and well-constructed information that breaks down complex topics into manageable bites. The Bankrate promise
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We receive compensation for placement of sponsored products or services, or when you click on certain hyperlinks on our website. So, this compensation can affect the way, location and in what order items are listed in the event that they are not permitted by law. This is the case for our mortgage, home equity and other home lending products. Other factors, like our own website rules and whether or not a product is offered in your area or at your personal credit score may also influence the way and place products are listed on this website. We strive to provide an array of offers, Bankrate does not include specific information on every credit or financial product or service. A penalty for late payments can keep you from saving interest. There are many lenders that have this -however, it is becoming rarer — however, you are able to request modifications to the way payments are handled. You may also refinance, however, you will need to pay a cost to end the current contract. What is a prepayment agreement? The prepayment clauses outline the time and manner in which the borrower may pay off the loan. There may be an early payment penalty, the cost of paying off a loan in advance or making additional payments. This is particularly prevalent with auto loans which have precomputed interest. There is a possibility of an amount of a rebate or a partial refund but it’s not enough to pay the entire amount of interest you paid. The penalty for early payment makes it difficult to settle the principal amount or . If your loan is at a high interest rate, you’ll end up paying a significant amount to your lender and not be in a position to lower the principal. Since the value of cars decreases and the more you pay in interest, the more likely to end up . Prepayment clauses impact automobile loans The two main ways in which prepayment clauses can affect your . It is possible that you will not be able to pay the principal down. A prepayment provision might make it difficult to pay principal down. Instead, the additional amount is used to pay for your next payment. It could be useful in a pinch by lowering the amount that you owe month-to-month, but you’ll still have to pay a large sum of interest. Refinancing is more difficult A prepayment agreement could contain an early payment penalty, which could make refinancing more expensive as it is worth. But provided you’ll save more in interest rates with a new lender and you’re able to achieve a profit. How to avoid auto loan prepayment penalties It is possible to avoid penalties for prepayment on an auto loan. However, the precise method for avoiding them depends on what you’re trying for. If you’re looking for the loan Discuss prepayment penalties with your lender. You should be aware of the penalties up front. Many lenders, including credit unions and banksdo not have prepayment clauses included in their contracts. You can avoid a lot of hassles in the future by checking this before you take out the loan. If you’re looking to refinance follow the same procedure in comparing lenders. Compare the options that do not impose a prepayment clause. If you decide to refinance you’ll be able to make the additional payments you want. Be aware of the costs associated with refinancing in the event that your current loan has a prepayment penalty. Check out an online calculator to determine whether it’s a good fit to your budget. Consider the cost as part of the current loan amount to decide if refinancing is worth it. If you’re satisfied with your loan Negotiating the terms with your existing lender is also an option if you don’t want to refinance. It is possible to request additional payments be applied to the principal even if you have an agreement to pay in advance. But this is far from being guaranteed. Most lenders won’t alter the terms of a loan contract without a valid reason. Keep in mind certain lenders don’t have prepayment clauses , but apply additional payments to interest first. Call your lender and ask that your money be put towards the principal. If there’s no prepayment provision, your lender has to comply. The bottom line Not all states permit prepayment penalties , and no lender can charge one on a over 60 months. However, if your contract includes one you can work around it. Begin by communicating with your lender and asking for payments to be applied differently. If that doesn’t work look into refinancing. Even with a prepayment penalty it is possible to save on interest throughout the term of your auto loan. Find out more
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Written by personal and business financial writer Kellye Guinan is a freelance editor and writer with over five years ‘ experience within personal finance. She’s also a full-time worker at her local library where she helps her community access information about 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 late 2021. They are dedicated to helping their readers to take control of their finances through providing precise, well-researched and researched information that breaks down otherwise complicated subjects into bite-sized pieces.
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