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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 aim is to assist you make smarter financial decisions by offering you interactive tools and financial calculators that provide objective and original content. This allows you to conduct research and compare data for no cost to help you make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this website are provided by companies who pay us. This compensation may impact how and when products are featured on this site, including, 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. This compensation, however, does affect the information we publish, or the reviews that appear on this website. We do not include the vast array of companies or financial deals that could be available to you. Getty Images – Eternity in an Instant

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 where she helps people in her community gain access to information on financial literacy, among other subjects. 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 control their finances through providing precise, well-researched, and well-constructed information that breaks down otherwise complex topics into manageable bites. The Bankrate guarantee

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So, this compensation can impact how, where and in what order products appear within listing categories in the event that they are not permitted by law for our mortgage, home equity and other products for home loans. Other factors, like our own website rules and whether the product is offered in your area or at your own personal credit score may also influence the way and place products are listed on this site. While we strive to provide the most diverse selection of products, Bankrate does not include specific information on every financial or credit product or service. The penalties for prepayment can stop you from saving money on interest. There are many lenders that have this — though it is becoming rarer — however you can ask for changes in the method by which payments are handled. You can also refinance but be prepared to pay a charge to cancel your current contract. What is a prepayment agreement? prepayment clauses define the time and manner in which the borrower is able to pay off the loan. Some may have an early payment penalty, a fee for paying off the loan in advance or making additional payments. This is most common for auto loans that use precomputed interest. There is a possibility of some sort of rebate or refund, but it won’t cover the full amount of interest that you have paid. Prepayment penalties make it difficult to pay down the principal amount or . In the event that your loan is a high-interest rate, you’ll be paying a significant cost to your lender but not capable of reducing the amount. Since the value of cars decreases so the more you have to spend on interest, the more likely you are to be . What are the effects of prepayment clauses on auto loans Two primary ways that prepayment clauses affect your . You might not be able to pay principal down A prepayment clause might make it difficult to pay principal down. The extra amount goes toward your next payment. It can help in times of need by reducing the amount that you owe month-to-month, but you’ll still have to pay an quantity of interest. Refinancing is more difficult A prepayment clause may include the possibility of a penalty for prepayment that can make refinancing more expensive than it’s worth. If you can save in interest rates with a new lender and you’re able to achieve a profit. How do you stay clear of auto loan prepayment penalties It’s possible to avoid penalties for prepayment on your auto loan. However, the method of getting rid of them is contingent on what you’re trying for. If you are in the market for the loan Discuss prepayment penalties and penalties with your lender. You want to be up in the beginning. A lot of lenders — including credit unions and banks- don’t have prepayment clauses in their contracts. It is possible to avoid a number of headaches in the future by making sure you know that you have this clause in place prior to taking out the loan. If you’re considering refinancing Follow the same process when comparing new lenders. Compare alternatives that don’t impose a prepayment clause. If you decide to refinance it, you’ll be in a position to make any extra payments you’d like. But consider the costs of refinancing if the current loan is subject to an early payment penalty. Use an to see whether it’s a good fit in your budget. Consider the cost as part of your new loan amount to determine if it’s worth refinancing. If you’re content with your loan negotiations the terms with your existing lender is also an alternative in the event that you don’t wish to refinance. You may request extra payments to be applied to the principal, even if there is an agreement to pay in advance. However, this isn’t guarantee. Most lenders won’t alter an loan contract without a valid reason. Keep in mind some lenders do not have prepayment clauses but still make additional payments to the interest first. Call your lender and ask that your funds be transferred to the principal. If there’s no prepayment clause, your lender must comply. The bottom line Not all states have prepayment penalties — and no lender will charge one on an over 60-month contract. But if your contract already includes one it is possible to work around it. Begin by communicating with your lender and asking for payments to be used in a different way. If this doesn’t work, consider refinancing. Even with a penalty for prepayment it is possible to save on interest for the duration 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 over five years ‘ experience within personal finance. She’s also a full-time worker at her local library where she helps the community gain access to information on financial literacy, among other topics. 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 the confidence to manage their finances with clear, well-researched information that dissects complicated topics into digestible pieces.

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