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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 goal is to help you make better financial decisions by offering you interactive financial calculators and tools as well as publishing impartial and unique content. This allows users to conduct studies and analyze data for free – so that you can make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this website are provided by companies that pay us. This compensation could affect how and where products appear on this site, including such things as the order in which they appear within the listing categories, except where prohibited by law for our loan products, such as mortgages and home equity, and other home lending products. But this compensation does have no impact on the information we provide, or the reviews appear on this website. We do not include the entire universe of businesses or financial offerings that might be accessible to you. The eternal 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 on a freelance basis with more than five years of experience in personal finance. She also is a full-time worker at her local library, where she assists the community to access information on financial literacy, in addition to other subjects. 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 by providing concise, well-researched and well-documented information that breaks down complicated subjects into digestible pieces. The Bankrate promise

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We are compensated in exchange for the promotion of sponsored goods and, services, or by you clicking on specific links on our website. Therefore, this compensation may affect the way, location and in what order products appear in listing categories and categories, unless it is prohibited by law. This is the case for our mortgage or home equity products, as well as other home lending products. Other elements, such as our own rules for our website and whether a product is available within the area you reside in or is within your personal credit score may also influence how and where products appear on this website. Although we try to offer a wide range offers, Bankrate does not include details about every financial or credit product or service. The penalties for prepayment can stop you from saving interest. There are many lenders that have this -but it’s becoming more rare, but you can request changes in the method by which payments are handled. You may also refinance, but be prepared to pay a cost to cancel the current contract. What is a prepayment clause? The prepayment clauses outline how and when the borrower is able to pay off a loan. There may be an early payment penalty, the cost of paying off the loan in advance or making additional payments. This is most common for auto loans which have precomputed interest. There is a possibility of a partial refund or rebate but it’s not enough to be enough to cover the total amount of interest you paid. The penalty for early payment makes it difficult to reduce the principal or . If you’re loan has a high interest rate, you’ll be paying a significant cost to your lender but not capable of reducing the amount. Since cars appreciate in value, the more you pay in interest and fees, the more likely you are to be . Prepayment clauses impact auto loans There are two main ways prepayment clauses impact your . It is possible that you will not be able pay principal down. A prepayment clause could make it difficult to pay principal down. The extra amount goes toward your next payment. It can help in the event of a crisis by reducing the amount that you have to pay month-to-month, however you’ll still have to pay an amount of interest. Refinancing can be more difficult prepayment clause could include the possibility of a penalty for prepayment that can cause refinancing to be more costly as it is worth. But provided you’ll save more in interest rates with a new lender and you’re able to be able to make it work. How do you avoid auto loan prepayment penalties It’s possible to avoid penalties for prepayment for your auto loan. However, the precise method for staying clear of them will depend on the goals you’re trying to accomplish. If you are seeking an loan Discuss prepayment penalties in conjunction with the lender. You should be aware of the penalties up on the front. A lot of lenders — including banks and credit unions — don’t 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 the loan. If you’re planning to refinance follow the same procedure when comparing new lenders. Compare options that don’t enforce the prepayment clause. If you decide to refinance, you’ll be able to make any extra payments you’d like. But consider the costs of refinancing in the event that your current loan has an early payment penalty. Utilize an application to determine whether refinancing is a good idea for your budget. Calculate the fee as part of your new loan amount to determine if it’s worth refinancing. If you’re content with the terms of your loan Negotiating with your current lender is an alternative if you do not want to refinance. It is possible to request additional installments to be applied to your principal, even if you have a prepayment clause. However, this isn’t guaranteed. Most lenders won’t modify the terms of a loan contract without justification. Be aware that some 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 not a prepayment clause in place, your lender has to comply. The bottom line is that not all states permit prepayment penalties , and the law states that no lender is able to charge one for more than 60 months. However, if your contract has one, there are ways to work around it. Start by getting in touch with your lender and asking for payments to be applied differently. If this doesn’t work, consider refinancing. Even with a prepayment penalty, you may be able to save on interest throughout the term of your car loan. Learn more

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Written by personal and business financial writer Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finance. She is also an employee full-time at her local library where she helps the community gain access to information on financial literacy, in addition to other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers to manage their finances by providing concise, well-researched, and well-structured information that breaks down otherwise complex topics into manageable bites.

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