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 aim is to assist you make better financial decisions by offering interactive tools and financial calculators, publishing original and objective content. We also allow users to conduct research and compare data for no cost to help you make sound 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 offers that appear on this site are from companies that pay us. This compensation may impact how and when products are featured on this website, for example, for example, the order in which they be listed within the categories of listing, except where prohibited by law for our mortgage, home equity, and other products for home loans. However, this compensation will have no impact on the information we provide, or the reviews you see on this site. We do not include the vast array 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. personal and Business Finance writer Kellye Guinan is an editor and writer on a freelance basis with more than five years of experience in personal finance. She is also employed full-time at the local library where she helps her community access information about financial literacy, among other subjects. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain confidence to control their finances with concise, well-researched and well-documented information that breaks down complicated subjects into digestible pieces. The Bankrate promise
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Therefore, this compensation may affect the way, location and in what order items appear in listing categories in the event that they are not permitted by law. This is the case for our mortgage or home equity products, as well as other home loan products. Other factors, like our own website rules and whether a product is offered in the area you reside in or is within your self-selected credit score range could also affect the way and place products are listed on this website. We strive to provide an array of offers, Bankrate does not include details about every financial or credit item or product. A penalty for late payments can keep you from saving interest. Many lenders have it -but it’s becoming rarer — however, you are able to request changes in the method by which payments are handled. You can also refinance but be prepared to pay a charge to end your current contract. What is a prepayment clause? prepayment clauses define how and when the borrower is able to pay off the loan. Some may have an early payment penalty, a fee for paying off a loan in advance or making additional payments. This is most common for 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 . In the event that you’re loan is at a high interest rate, you’ll end up paying a significant cost to your lender without being capable of reducing the amount. Since cars appreciate in value so the more you have to spend on interest, the more likely to be . Prepayment clauses impact the auto loans The two major ways in which prepayment clauses can affect your . You may not be able to pay the principal down. A prepayment clause could make it difficult to pay the principal down. Instead, the additional amount is used to pay for the next installment. It can be helpful in the event of a crisis by reducing the amount you have to pay month-to-month, however you’ll still end up paying an enormous sum of interest. Refinancing can be more difficult prepayment clause could include a prepayment penalty that could make refinancing more expensive as it is worth. However, if you save on interest by switching to a different lender and you’re able to manage to break even. How do you avoid prepayment penalties on auto loan prepayment penalties It’s possible to avoid penalties for prepayment for the auto loan. But the exact process of avoiding them depends on what you’re trying for. If you’re in the market for a loan Talk about penalties for early payment with your lender. It is important to be upfront front. A lot of lenders, such as credit unions and banksdo not have prepayment clauses in their contracts. You can steer clear of a lot of future headaches by ensuring that you have this clause in place prior to taking out the loan. If you’re planning to refinance follow the same procedure when you compare lenders. Compare the options that do not impose an obligation to pay in advance. After refinancing, you’ll be able to make the additional 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 to your budget. Calculate the fee as part of your new loan amount to decide if refinancing is worth it. If you’re content with your loan negotiations with your current lender can be a viable alternative in the event that you don’t wish to refinance. You can request that additional installments to be applied to your principal, even if there is the prepayment clause. But this is far from being guaranteed. Most lenders won’t modify the terms of a loan contract without good reason. Keep in mind some lenders don’t have prepayment clauses , but require additional payments for interest first. Call your lender and ask that your funds be put towards the principal. If there’s no prepayment clause in place, your lender is required to adhere. The bottom line: Not all states have prepayment penalties — and no lender will charge one on a over 60 months. If your contract includes one, there are ways to work around it. Begin by communicating the lender and asking for the payments to be made in a different manner. If this doesn’t work, think about refinancing. Even with a prepayment penalty it is possible to save money on interest throughout the term of your auto loan. Learn more
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Written by Personal and business finance Contributor Kellye Guinan is a freelance editor and writer who has more than five years ‘ experience within personal finance. She also is an employee full-time at her local library, helping people in her community get information on financial literacy, as well as other subjects. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers to manage their finances with clear, well-researched information that breaks down complicated topics into digestible pieces.
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