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 choices by offering you interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare data for no cost to help you make financial decisions with confidence. 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 where products appear on this site, including, for example, the order in which they appear in the listing categories, except where prohibited by law for our loans, mortgages,, and other products for home loans. But this compensation does have no impact on the information we provide, or the reviews appear on this website. We do not contain the entire universe of businesses or financial offers that may be open 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 a freelance editor and writer with more than five years of experience in personal financial planning. She is also a full-time worker at her local library, where she assists people in her community gain access to information on 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 passionate about helping readers gain confidence to control their finances with precise, well-researched, and well-constructed information that breaks down otherwise complicated subjects into digestible pieces. The Bankrate guarantee
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So, this compensation can impact how, where and in what order products are listed in the event that they are not permitted by law. We also offer mortgage or home equity products, as well as other products for home loans. Other factors, such as our own website rules and whether a product is available within your region or within your self-selected credit score range can also impact how and where products appear on this website. We strive to provide the most diverse selection of products, 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 -but it's becoming rarer -- however you can ask for modifications to the way payments are handled. You may also refinance, but be prepared to pay a fee to get out of your current contract. What a prepayment clause is prepayment clauses define how and when the borrower may pay off a loan. There may be a prepayment penalty -- an amount to be paid for repaying the loan in advance or making additional payments. This is most common for auto loans that use precomputed interest. You could be eligible for an amount of a rebate or a partial refund, but it won't be enough to cover the total amount of interest that you have paid. Prepayment penalties make it difficult to reduce the principal amount . And if the loan has a high interest rate, you'll end up paying a large amount to your lender but not capable of reducing the amount. Because cars depreciate in value and the more you pay in interest and fees, the more likely to end up . How prepayment clauses affect the auto loans There are two primary ways that prepayment clauses affect your . You may not be able to pay principal down A prepayment clause might make it difficult to pay for the principal. Instead, that additional amount will be used towards your next payment. It can help in times of need by reducing the amount that you pay monthly, but you'll still have to pay a large quantity of interest. Refinancing can be more difficult prepayment clause could include an early payment penalty, which could result in refinancing costing more that it's actually worth. But provided you'll save more in interest rates with a new lender and you're able to be able to make it work. How to get rid of prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment for your auto loan. However, the precise method for avoiding them depends on what you're trying for. If you are seeking an loan discuss penalties for prepayment with your lender. You want to be up on the front. Many lenders, including credit unions and banksdo not have prepayment clauses included in their contracts. It is possible to avoid a number of headaches in the future by making sure you know this before you take out an loan. If you're looking to refinance Follow the same process in comparing lenders. Compare the options that do not impose the prepayment clause. If you decide to refinance, you'll be able to make the additional payments you want. Be aware of the costs associated with refinancing in the event that your current loan has prepayment penalties. Use an to see whether refinancing is a good idea for your budget. Consider the cost as part of your current loan amount to decide if refinancing is worth it. If you're content with the terms of your loan negotiations to your present lender is an alternative if you do not 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 guaranteed. The majority of lenders will not alter a loan contract without good reason. Take note that some lenders do not have prepayment clauses but still make additional payments to the interest first. Contact your lender and ask that your funds be put towards the principal. If there's no prepayment clause in place, your lender must comply. The bottom line is that not all states allow 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 contacting the lender and asking them to allow payments to be applied differently. If this doesn't work, consider refinancing. Even with a penalty for prepayment it is possible to save money on interest throughout the term 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 finance. She's also an employee full-time at her local library where she helps the community gain access to information on financial literacy, among other subjects. 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 their readers feel confident to take control of their finances through providing clear, well-researched information that dissects complex topics into manageable bites.
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