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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 that provide objective and original content, by enabling users to conduct studies and compare data for no cost to help you make sound financial decisions. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site come from companies who pay us. This compensation may impact how and when products are featured on this website, for example, for example, the sequence in which they be listed within the categories of listing, except where prohibited by law. This applies to our loan products, such as mortgages and home equity and other home lending products. However, this compensation will affect the content we publish or the reviews you read on this site. We do not include the universe of companies or financial deals that could be available to you. Getty Images – Eternity in an Instant

2 min read Published June 30, 2022

Writer: Kellye Guinan. Written by 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 also is employed full-time at the local library, helping her community access information about 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 the end of 2021. They are committed to helping readers gain the confidence to manage their finances by providing clear, well-researched information that breaks down complex topics into manageable bites. The Bankrate guarantee

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We are compensated in exchange for the placement of sponsored products and, services, or through you clicking certain links posted on our website. This compensation could influence the manner, place and when products appear in listing categories, except where prohibited by law. We also offer mortgage home equity, mortgage and other home loan products. Other factors, like our own proprietary website rules and whether or not a product is available within your region or within your own personal credit score may also influence the way and place products are listed on this website. Although we try to offer 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 — though it is becoming more rare, however, you are able to request modifications to the way payments are handled. You can also refinance however, you will need to pay a fee to end the current contract. What a prepayment clause is Prepayment clauses specify how and when the borrower is able to pay off the loan. There may be an early payment penalty, a fee for paying off a loan early or making extra payments. This is particularly prevalent with auto loans which use precalculated interest. You may be entitled to a partial refund or rebate however it will not pay the entire amount of interest that you have paid. The penalty for early payment makes it difficult to settle the principal amount or . And if the loan is at a high interest rate, you’ll end up paying a large cost to your lender but not able to reduce the principal. Since the value of cars decreases so the more you have to pay in interest, the more likely you are to end up . Prepayment clauses impact the auto loans The two main ways prepayment clauses impact your . You may not be able to pay principal down. A prepayment clause may make it impossible to pay principal down. The extra amount will be used towards your next monthly payment. It can be helpful in the event of a crisis by reducing the amount that you have to pay month-to-month, however you’ll still end up paying an sum of interest. The process of refinancing can be more challenging. A prepayment clause may include a prepayment penalty that could cause refinancing to be more costly as it is worth. However, if you save in interest rates with a new lender, you may still achieve a profit. How to get rid of auto loan prepayment penalties It’s possible to avoid penalties for prepayment on your auto loan. However, the precise method for staying clear of them will depend on the goals you’re trying to achieve. If you are in the market for an loan Talk about penalties for early payment and penalties with your lender. It is important to be upfront in the beginning. Many lenders, including banks and credit unions — don’t have prepayment clauses in their agreements. 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 a loan. If you’re looking to refinance use the same method when comparing new lenders. Compare options that don’t enforce an obligation to pay in advance. Once you refinance it, you’ll be in a position to make any extra payments you’d like. Be aware of the costs associated with refinancing in the event that your current loan is subject to a prepayment penalty. Check out an online calculator to determine whether refinancing is a good idea in your budget. Calculate the fee as part of the current loan amount to decide if refinancing is worth it. If you’re happy with the terms of your loan negotiation with your current lender is an option if you don’t want to refinance. You may request extra installments to be applied to your principal, even if there is the prepayment clause. But this is far from guarantee. Most lenders won’t alter a loan contract without good reason. Keep in mind some lenders do not have prepayment provisions, but they will apply additional payments to interest first. Contact your lender and ask them to let the money be put towards the principal. If there’s not a prepayment clause in place, your lender is required to adhere. The bottom line: Not all states have penalties for prepayment — and no lender is able to charge one for a over 60 months. If your contract has one you can overcome it. Start by getting in touch the lender and asking them to allow payments to be applied differently. If that doesn’t work consider refinancing. Even with a prepayment penalty you could be able to save money on interest over the life of your car loan. Find out more

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Written by personal and business financial writer Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal financial planning. She is also employed full-time at the local library where she helps her community access information about financial literacy, as well as other topics. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers feel confident to take control of their finances with precise, well-researched and researched information that breaks down otherwise complex topics into manageable bites.

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