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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 aim is to assist you make better financial decisions by offering interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare data for no cost - so that you can 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 products that are advertised on this site are from companies who pay us. This compensation can affect the way and when products are featured on this site, including for instance, the order in which they may appear in the listing categories and other categories, unless prohibited by law for our mortgage, home equity, and other home lending products. But this compensation does have no impact on the content we publish or the reviews you read on this site. We do not include the vast array of companies or financial offers that may be accessible to you. Eternity in an Instant/Getty Images
2 min read Published June 30, 2022
Kellye Guinan Kellye Guinan. Personal and business finance contributor Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial planning. She is also a full-time worker at her local library where she helps her community access information about financial literacy, among other topics. Written 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 the confidence to manage their finances with precise, well-researched, and well-constructed information that breaks down complex topics into manageable bites. The Bankrate promise
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You may also refinance, however, you will need to pay a charge to end the current contract. What is a prepayment clause? The prepayment clauses outline the time and manner in which the borrower is able to pay off the loan. There may be the prepayment penalty- a fee for paying off a loan early or making extra payments. This is most common for auto loans which use precalculated interest. You may be entitled to a partial refund or rebate however it will not be enough to cover the total amount of interest that you have paid. Prepayment penalties make it difficult to pay down the principal amount . In the event that the loan has a high interest rate, you'll end up paying a substantial sum to the lender without being in a position to lower the principal. Since the value of cars decreases so the more you have to pay in interest and fees, the more likely to be . How prepayment clauses affect the auto loans There are two major ways prepayment clauses impact your . It is possible that you will not be able to pay principal down A prepayment clause might make it difficult to pay for the principal. The extra amount will be used towards the next installment. It could be useful in times of need by reducing the amount you have to pay month-to-month, however you'll still have to pay an amount of interest. The process of refinancing can be more challenging. A prepayment clause may include an early payment penalty, which could cause refinancing to be more costly that it's actually worth. If you can save on interest with a new lender and you're able to be able to make it work. How do you get rid of auto loan prepayment penalties It is possible to avoid penalties for prepayment for an auto loan. But the exact process of staying clear of them will depend on the goals you're trying for. If you are looking for a loan Discuss prepayment penalties with your lender. You want to be up on the front. Plenty of lenders -- including banks and credit unions -do not include prepayment clauses included in their contracts. You can steer clear of a lot of headaches in the future by making sure you know that you have this clause in place prior to taking out the loan. If you're planning to refinance use the same method in comparing lenders. Compare the options that do not impose a prepayment clause. After refinancing it, you'll be in a position to make any extra payments you'd like. However, you should consider the cost of refinancing if the current loan has prepayment penalties. Check out an online calculator to determine if it makes sense in your budget. Calculate the cost as a percentage of your new loan amount to decide if refinancing is worth it. If you're happy with the terms of your loan negotiation the terms with your existing lender can be a viable alternative if you do not want to refinance. It is possible to request additional installments to be applied to your principal even if you have the prepayment clause. But this is far from guaranteed. The majority of lenders will not 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. Call your lender and ask that your funds be applied to the principal. If there's no prepayment clause in place, your lender is required to adhere. The bottom line is that not all states allow prepayment penalties , and no lender is able to charge one for a over 60 months. But if your contract already includes one it is possible to work around it. Start by getting in touch to your lender and asking them to allow payments to be made in a different manner. If that doesn't work consider refinancing. Even with a penalty for prepayment, you may be able to save on interest throughout the term of your car 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 5 years experience working in the field of personal finance. She also is employed full-time at the local library, where she assists her community access information about financial literacy, as well as other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers to manage their finances through providing precise, well-researched and researched information that breaks down complicated topics into digestible pieces.
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