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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. We also allow you to conduct research and analyze data for free – so that you can make informed financial decisions. Bankrate has agreements 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 site come from companies that pay us. This compensation may impact how and where products appear on this website, for example for instance, the order in which they may be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage, home equity, and other products for home loans. But this compensation does not influence the information we provide, or the reviews that you read on this site. We do not contain the vast array of companies or financial offers that may be available to you. Getty Images – Eternity in an Instant

2 min read Published June 30, 2022

Kellye Guinan Kellye Guinan. personal and Business Finance contributor Kellye Guinan is an editor and writer freelance with over five years of experience in personal finance. She also is a full-time worker at her local library, helping the community to access information on financial literacy, among other topics. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to take control of their finances through providing clear, well-researched information that breaks down complex topics into manageable bites. The Bankrate promises

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They ensure that what we write ensures that everything we publish is accurate, objective and trustworthy. The loans reporter and editor concentrate on the things that consumers care about the most — the different types of lending options as well as the most favorable rates, the top lenders, the best ways to pay off debt and many more, so you’ll be able to feel secure when investing your money. Editorial integrity

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If you have questions about money. Bankrate has answers. Our experts have helped you understand your money for over four decades. We strive to continuously give consumers the professional guidance and the tools necessary to make it through life’s financial journey. Bankrate adheres to strict standards , so you can trust that our information is trustworthy and precise. Our award-winning editors and reporters produce honest and reliable content to help you make the best financial decisions. Our content produced by our editorial team is objective, truthful and uninfluenced from our advertising. We’re open about how we are capable of bringing high-quality information, competitive rates and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products or services, or through you clicking certain links posted on our site. Therefore, this compensation may influence the manner, place and in what order items appear in listing categories, except where prohibited by law. We also offer mortgage, home equity and other products for home loans. Other factors, such as our own rules for our website and whether or not a product is available in your region or within your own personal credit score may also influence the manner in which products appear on this website. We strive to provide a wide range offers, Bankrate does not include details about each credit or financial item or product. A penalty for late payments can keep you from saving money on interest. There are many lenders that have this -however, it is becoming rarer — but you can request changes to how the payments are made. You can also refinance however, you will need to pay a charge to end the current contract. What a prepayment clause is The prepayment clauses outline the time and manner in which the borrower is able to pay off the loan. Some may have the prepayment penalty- the cost of paying off the loan earlier or making additional payments. This is most common for auto loans which have precomputed interest. You could be eligible for a partial refund or rebate but it’s not enough to be enough to cover the total amount of interest that you have paid. Prepayment penalties make it difficult to reduce the principal amount . If the loan is a high-interest rate, you’ll end up paying a large amount to your lender and not be in a position to lower the principal. Since cars appreciate in value and the more you pay in interest and fees, the more likely to end up . Prepayment clauses impact automobile loans The two main ways that prepayment clauses affect your . It is possible that you will not be able pay principal down A prepayment clause could make it difficult to pay for the principal. Instead, the additional amount goes toward your next monthly payment. It could be useful in times of need by reducing the amount that you have to pay month-to-month, however you’ll still be paying an amount of interest. Refinancing is more difficult A prepayment agreement could contain a prepayment penalty that could make refinancing more expensive than it’s worth. However, if you save in interest rates with a new lender and you’re able to achieve a profit. How to get rid of prepayment penalties on auto loan prepayment penalties It is possible to avoid prepayment penalties 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 are seeking the loan Discuss prepayment penalties and penalties with your lender. You want to be up in the beginning. Many lenders, including credit unions and banks- don’t have prepayment clauses in their agreements. It is possible to avoid a number of hassles in the future by checking that you have this clause in place prior to taking out an loan. If you’re considering refinancing follow the same procedure when you compare 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 want. But consider the costs of refinancing if your current loan has an early payment penalty. Use an to see whether refinancing is a good idea for your budget. Calculate the fee as part of the current loan amount to determine if it’s worth refinancing. If you’re satisfied with your loan negotiations the terms with your existing lender is also an option if you don’t want to refinance. You can request that additional payments to be applied to the principal, even if you have the prepayment clause. However, this isn’t being guaranteed. Most lenders won’t modify the terms of a loan contract without good reason. Keep in mind some lenders do not have prepayment clauses , but require additional payments for interest first. Reach out to your lender and request that your funds be applied to the principal. If there’s no prepayment clause that you can use, your lender is required to adhere. The bottom line: Not all states allow prepayment penalties , and the law states that no lender can charge one on more than 60 months. But if your contract already includes one, there are ways to get around it. Begin by communicating to your lender and asking them to allow payments to be made in a different manner. If that doesn’t work consider refinancing. Even with a penalty for prepayment you could be able to save money on interest throughout the term of your auto loan. Find out more

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Written by Business and personal Finance contributor Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finance. She is also an employee full-time at her local library, helping her community access information about financial literacy, as well as other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances by providing clear, well-researched information that dissects complicated topics into digestible pieces.

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