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 smarter financial decisions by offering you interactive financial calculators and tools that provide objective and original content. We also allow you to conduct research and compare data for no cost – so that you can 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 offers that appear on this website are provided by companies that compensate us. This compensation can affect the way and when products are featured on this site, including such things as 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 lending products. But this compensation does not influence the content we publish or the reviews that appear on this website. We do not include the entire universe of businesses or financial offerings that might 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 on a freelance basis with over five years of experience in personal finance. She also is employed full-time at the local library, helping her community access information about financial literacy, in addition to other topics. Written 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 gain the confidence to manage their finances by providing clear, well-researched facts that break down complicated topics into bite-sized pieces. The Bankrate guarantee

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Therefore, this compensation may influence the manner, place and in what order products are listed 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 factors, such as our own proprietary website rules and whether a product is available within your area or at your self-selected credit score range could also affect 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 credit or financial products or services. A penalty for late payments can keep you from saving interest. Many lenders have it — though it is becoming more rare, but you can request changes to how payments are applied. You may also refinance, but you must be ready to pay a cost to cancel the current contract. What a prepayment clause is prepayment clauses define how and when a borrower can pay off a loan. Certain clauses may include the prepayment penalty- a fee for paying off the loan earlier or making additional payments. This is most common for auto loans that use precomputed interest. There is a possibility of an amount of a rebate or a partial refund, but it won’t pay the entire amount of interest you paid. The penalties for prepayment make it hard to pay down the principal amount . In the event that you’re loan is a high-interest rate, you’ll be paying a large sum to the lender but not in a position to lower the principal. Since cars appreciate in value, the more you pay in interest, the more likely you are to end up . What are the effects of prepayment clauses on the auto loans There are two major ways prepayment clauses impact your . You may not be able to pay the principal down. A prepayment provision could make it difficult to pay the 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 pay monthly, but you’ll still be paying an enormous amount of interest. Refinancing is more difficult A prepayment clause could include a prepayment penalty that could make refinancing more expensive that it’s actually worth. But provided you’ll save more on interest with a new lender, you may still be able to make it work. How do you get rid of auto loan prepayment penalties It’s possible to avoid prepayment penalties on the auto loan. But the exact process of getting rid of them is contingent on what you’re trying to accomplish. If you’re in the market for the loan discuss penalties for prepayment in conjunction with the lender. You want to be up on the front. Plenty of lenders, such as credit unions and banksdo not include 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 an loan. If you’re considering refinancing follow the same procedure when you compare lenders. Compare options that don’t enforce an obligation to pay in advance. If you decide to refinance it, you’ll be in a position to make any extra payments you want. But consider the costs of refinancing in the event that your current loan is subject to prepayment penalties. Check out an online calculator to determine if it makes sense to your budget. Calculate the cost as a percentage of the current loan amount to determine if refinancing is a good idea. If you’re happy with the terms of your loan Negotiating to your present lender can be a viable alternative if you do not want to refinance. You may request extra payments to be applied to the principal even if you have the prepayment clause. However, this isn’t guaranteed. Most lenders won’t alter the terms of a loan contract without good reason. Keep in mind some lenders do not have prepayment clauses but still make additional payments to the interest first. Contact your lender and ask them to let the money be transferred to the principal. If there’s no prepayment clause, your lender is required to adhere. The bottom line: Not all states have prepayment penalties , and the law states that no lender will charge one on a over 60 months. If your contract includes one you can get around it. Start by getting in touch with your lender and asking for the payments to be made in a different manner. If this doesn’t work, look into refinancing. Even with a prepayment penalty you could be able to save money on interest for the duration of your auto loan. Learn more


Written by Personal and business finance contributor Kellye Guinan is a freelance editor and writer with more than five years of experience in personal financial planning. She also is 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 writing and editing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to take control of their finances through providing concise, well-researched, and well-structured information that dissects complicated subjects into bite-sized pieces.

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