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 smarter financial decisions by offering interactive financial calculators and tools that provide objective and original content, by enabling you to conduct research and compare data for no cost and 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 Earn money The products that are advertised on this site come from companies that pay us. This compensation may impact how and when products are featured on the site, such as, for example, the order in which they appear in the listing categories, except where prohibited by law. This applies to our loans, mortgages,, and other home loan products. This compensation, however, does have no impact on the content we publish or the reviews that you see on this site. We do not cover the universe 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. Written by Personal and business finance writer Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finance. She is also employed full-time at the local library, where she assists the community to access information on 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 from late 2021. They are dedicated to helping readers gain the confidence to control their finances by providing precise, well-researched, and well-constructed information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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This compensation could affect the way, location and in what order products are listed, except where prohibited by law. This is the case for our mortgage or home equity products, as well as other products for home loans. Other factors, like our own website rules and whether or not a product is available in your area or at your own personal credit score can also impact the way and place products are listed on this website. We strive to provide the most diverse selection of products, Bankrate does not include specific information on every financial or credit products or services. Prepayment penalties can prevent you from saving money on interest. There are many lenders that have this -however, it is getting more common, however you can ask for changes in the method by which payments are handled. You may also refinance, but you must be ready to pay a charge to cancel your current contract. What is a prepayment clause? prepayment clauses define how and when the borrower may pay off a loan. Certain clauses may include the prepayment penalty- a fee for paying off a loan early or making extra payments. This is most common for auto loans which have precomputed interest. There is a possibility of some sort of rebate or refund but it’s not enough to be enough to cover the total amount of interest that you have paid. The penalty for early payment makes it difficult to pay down the principal amount or . If your loan has a high interest rate, you’ll be paying a large amount to your lender and not be in a position to lower the principal. Because cars depreciate in value, the more you pay in interest, the more likely to end up . What are the effects of prepayment clauses on the auto loans Two primary ways that prepayment clauses affect your . It is possible that you will not be able to pay the principal down. A prepayment clause could 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 you pay monthly, but you’ll still have to pay a large quantity of interest. The process of refinancing can be more challenging. A prepayment agreement could contain a prepayment penalty that could result in refinancing costing more that it’s actually worth. But provided you’ll save more on interest with a new lender and you’re able to achieve a profit. How to avoid auto loan prepayment penalties It is possible to avoid penalties for prepayment on an auto loan. However, the method of staying clear of them will depend on the goals you’re trying for. If you are looking for a loan Talk about penalties for early payment in conjunction with the lender. You want to be up front. Plenty of lenders — including credit unions and banksdo not include prepayment clauses included in their contracts. You can avoid a lot of hassles in the future by checking this before you take out the loan. If you’re looking to refinance follow the same procedure when comparing new lenders. Compare options that don’t enforce a prepayment clause. After refinancing, you’ll be able to make any additional payments you’d like. However, you should consider the cost of refinancing if the current loan is subject to prepayment penalties. Utilize an application to determine whether refinancing is a good idea for your budget. Calculate the fee as part of your total loan amount to determine if it’s worth refinancing. If you’re satisfied with the terms of your loan Negotiating to your present lender is an option if you don’t want to refinance. It is possible to request additional payments to be applied to the principal even if you have the prepayment clause. But this is far from guarantee. The majority of lenders will not alter the terms of a loan contract without justification. Be aware that certain lenders don’t have prepayment clauses , but apply additional payments to interest first. Call your lender and ask them to let your funds be put towards the principal. If there’s not a prepayment clause that you can use, your lender has to comply. The bottom line Not all states allow prepayment penalties , and there is no way that a lender can charge one on a over 60 months. If your contract has one it is possible to get around it. Begin by communicating to your lender and asking for the payments to be used in a different way. If that doesn’t work, think about refinancing. Even with a prepayment penalty, you may be able to save money on interest for the duration of your auto loan. Find out more
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Written by Personal and business financial Contributor Kellye Guinan is a freelance editor and writer with over five years ‘ experience within personal finance. She is also employed full-time at the local library, helping the community gain access to information on financial literacy, in addition to other topics. 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 to take control of their finances by providing precise, well-researched and researched information that breaks down complicated subjects into bite-sized pieces.
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