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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 mission is to help you make better financial choices by providing you with interactive tools and financial calculators as well as publishing impartial and unique content. We also allow you to conduct research and compare data for no cost to help you make informed financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that are advertised on this website are provided by 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 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 not influence the information we publish, or the reviews that you read on this site. We do not include the universe of companies or financial deals that could be open 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 writer Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial planning. 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. 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 readers gain confidence to manage their finances with concise, well-researched and well-documented facts that break down complicated topics into bite-sized pieces. The Bankrate promise

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Therefore, this compensation may affect the way, location and in what order products appear within listing categories and categories, unless it is prohibited by law. We also offer mortgage, home equity and other products for home loans. Other elements, such as our own rules for our website and whether a product is available in the area you reside in or is within your personal credit score may also influence the manner in which products appear on this site. While we strive to provide 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. Many lenders have it -however, it is becoming rarer — however, you are able to request modifications to the way the payments are made. Refinancing is also an option, but you must be ready to pay a fee to cancel the current contract. What is a prepayment agreement? The prepayment clauses outline the time and manner in which the borrower may pay off a loan. Certain clauses may include an early payment penalty, a fee for paying off a loan earlier or making additional payments. This is particularly prevalent with auto loans which use precalculated interest. You may be entitled to an amount of a rebate or a partial refund however it will not be enough to cover the total amount of interest you paid. The penalty for early payment makes it difficult to settle the principal amount or . And if your loan has a high interest rate, you’ll end up paying a substantial sum to the lender but not in a position to lower the principal. Because cars depreciate in value, the more you spend on interest, the more likely to be . How prepayment clauses affect the auto loans The two main ways in which prepayment clauses can affect your . You may not be able pay principal down. A prepayment clause might make it difficult to pay principal down. Instead, the additional amount goes toward your next monthly payment. It can help in the event of a crisis by reducing the amount that you pay monthly, but you’ll still be paying an sum of interest. Refinancing is more difficult A prepayment agreement could contain the possibility of a penalty for prepayment that can make refinancing more expensive as it is worth. But provided you’ll save more in interest rates with a new lender, you may still be able to make it work. How do you avoid prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment for an auto loan. However, the precise method for staying clear of them will depend on the goals you’re trying to accomplish. If you’re in the market for the loan discuss penalties for prepayment with your lender. It is important to be upfront in the beginning. Plenty of lenders, including credit unions and banksdo not have prepayment clauses in their contracts. You can avoid a lot of headaches in the future by making sure you know this before you take out the loan. If you’re planning to refinance use the same method in comparing lenders. Compare options that don’t enforce the prepayment clause. If you decide to refinance you’ll be able to make any additional payments you’d like. But consider the costs of refinancing in the event that your current loan is subject to a prepayment 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 it’s worth refinancing. If you’re satisfied with the terms of your loan Negotiating with your current lender can be a viable option if you don’t want to refinance. It is possible to request additional payments be applied to the principal, even if you have the prepayment clause. However, this isn’t guarantee. Most lenders won’t modify a loan contract without a valid reason. Take note that some lenders don’t have prepayment clauses , but make additional payments to the interest first. Call your lender and request that your money be applied to the principal. If there’s not a prepayment clause, your lender is required to adhere. The bottom line: Not all states allow prepayment penalties , and the law states that no lender will charge one on more than 60 months. If your contract includes one, there are ways to overcome it. Begin by communicating the lender and asking for payments to be made in a different manner. If this doesn’t work, think about refinancing. Even with a penalty for prepayment you could be able to save money on interest throughout the term of your auto loan. Learn more


Written by Business and personal finance writer Kellye Guinan is a freelance editor and writer with over five years ‘ experience within personal financial planning. She is also employed full-time at the 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 gain the confidence to take control of their finances through providing precise, well-researched and researched information that breaks down otherwise complicated topics into digestible pieces.

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