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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 mission is to help you make better financial decisions by offering you interactive tools and financial calculators as well as publishing impartial and unique content. This allows users to conduct studies and compare information for free to help you 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 products that are advertised on this site are from companies that pay us. This compensation can affect the way and where products appear on this website, for example for instance, the order in which they may appear within the listing categories, except where prohibited by law. Our loans, mortgages,, and other home loan products. This compensation, however, does not influence the information we publish, or the reviews that you see on this site. We do not cover the entire universe of businesses or financial offers that may be open to you. Eternity in an Instant/Getty Images
2 min read Published June 30, 2022
Written by Kellye Guinan. personal and Business Finance Contributor Kellye Guinan is an editor and writer freelance with over five years of experience in personal financial planning. She is also an employee full-time at her local library, where she assists people in her community gain access to information on financial literacy, as well as other subjects. 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 committed to helping readers gain confidence to take control of their finances by providing concise, well-researched and well-documented facts that break down complicated topics into bite-sized pieces. The Bankrate promise
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So, this compensation can affect the way, location and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other products for home loans. Other elements, such as our own rules for our website and whether a product is available within the area you reside in or is within your personal credit score could also affect the manner in which products appear 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, but you can request changes in the method by which the payments are made. You can also refinance but you must be ready to pay a cost to end the current contract. What is a prepayment clause? prepayment clauses define how and when the borrower is able to pay off the loan. Certain clauses may include an early payment penalty, a fee for paying off the loan in advance or making additional payments. This is especially common with auto loans that use precomputed interest. You could be eligible for some sort of rebate or refund however it will not pay the entire amount of interest you paid. The penalty for early payment makes it difficult to settle the principal amount . And if your 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 spend on interest the more likely to be . What are the effects of prepayment clauses on the auto loans There are two major ways that prepayment clauses affect your . You might not be able pay principal down. A prepayment provision could make it difficult to pay principal down. Instead, that additional amount is used to pay for your next monthly payment. It could be useful in a pinch by lowering the amount you have to pay month-to-month, however you'll still be paying a large amount of interest. Refinancing is more difficult A prepayment agreement could contain a prepayment penalty that could cause refinancing to be more costly as it is worth. But provided you'll save more on interest by switching to a different lender and you're able to achieve a profit. How do you get rid of 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 to accomplish. If you're looking for the loan discuss penalties for prepayment and penalties with your lender. You should be aware of the penalties up on the front. A lot of lenders -- including credit unions and banksdo not have prepayment clauses in their agreements. It is possible to avoid a number of future headaches by ensuring this prior to taking out an loan. If you're considering refinancing use the same method when you compare lenders. Compare alternatives that don't impose an obligation to pay in advance. If you decide to refinance you'll be able to make any additional payments you want. However, you should consider the cost of refinancing in the event that your current loan has an early payment penalty. Check out an online calculator to determine whether it's a good fit for your budget. Consider the cost as part of your total loan amount to determine if refinancing is a good idea. If you're satisfied with the terms of your loan negotiations with your current lender is also an alternative if you do not want to refinance. You may request extra installments to be applied to your principal, even if you have a prepayment clause. However, this isn't guaranteed. The majority of lenders will not alter the terms of a loan contract without a valid reason. Take note that certain lenders don't have prepayment clauses , but require additional payments for interest first. Call your lender and request that your funds be transferred to the principal. If there's no prepayment clause in place, your lender has to comply. The bottom line Not all states allow penalties for prepayment -- and there is no way that a lender will charge one on a over 60 months. If your contract has one, there are ways to work around it. Begin by contacting to your lender and asking for the payments to be used in a different way. If that doesn't work, consider refinancing. Even with a penalty for prepayment you could be able to save on interest for the duration 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 with more than five years ' experience within personal financial planning. She is also a full-time worker at her local library where she helps people in her community get information on financial literacy, in addition to other subjects. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing precise, well-researched and researched information that breaks down complex topics into manageable bites.
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