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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 goal is to help you make better financial choices by offering interactive financial calculators and tools that provide objective and original content, by enabling users to conduct research and analyze data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this website are provided by companies that compensate us. This compensation can affect the way and when products are featured on this website, for example for instance, the order in which they may appear within the listing categories and other categories, unless prohibited by law for our loan products, such as mortgages and home equity and other home loan products. However, this compensation will affect the information we publish, or the reviews you see on this site. We do not cover the entire universe of businesses or financial offerings that might be available to you. Eternity in an Instant/Getty Images
2 min read Published June 30, 2022
Writer: Kellye Guinan Written by 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 employed full-time at the local library where she helps the community to access information on financial literacy, in addition to other subjects. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to manage their finances through providing clear, well-researched facts that break down complicated topics into bite-sized pieces. The Bankrate guarantee
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Therefore, this compensation may affect the way, location and in what order products appear within listing categories in the event that they are not permitted by law for our mortgage, home equity and other home lending products. Other factors, like our own rules for our website and whether or not a product is offered in the area you reside in or is within your personal credit score may also influence the manner in which products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include specific information on every credit or financial item or product. A penalty for late payments can keep you from saving money on interest. Many lenders have it -but it's becoming rarer -- however, you are able to request changes in the method by which the payments are made. You can also refinance however, you will need to pay a charge to get out of the current contract. What a prepayment clause is The prepayment clauses outline the time and manner in which a borrower can pay off the loan. There may be an early payment penalty, an amount to be paid for repaying the loan earlier or making additional payments. This is particularly prevalent with auto loans that use precomputed interest. You may be entitled to some sort of rebate or refund however it will not cover the full amount of interest you paid. The penalty for early payment makes it difficult to settle the principal or . And if your loan has a high interest rate, you'll end up paying a substantial sum to the lender and not be capable of reducing the amount. Since the value of cars decreases, the more you spend on interest the more likely you are to end up . What are the effects of prepayment clauses on auto loans The two main ways in which prepayment clauses can affect your . It is possible that you will not be able to pay principal down A prepayment clause may make it impossible to pay the principal down. The extra amount will be used towards the next installment. 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 can be more difficult prepayment agreement could contain the possibility of a penalty for prepayment that can cause refinancing to be more costly as it is worth. If you can save on interest with a new lender and you're able to manage to break even. How do you avoid prepayment penalties on auto loan prepayment penalties It is possible to avoid penalties for prepayment for your auto loan. However, the precise method for staying clear of them will depend on the goals you're trying to achieve. If you are seeking an loan discuss penalties for prepayment in conjunction with the lender. It is important to be upfront in the beginning. Plenty of lenders, including banks and credit unions -do not have prepayment clauses included in their contracts. You can avoid a lot of headaches in the future by making sure you know this before you take out the loan. If you're planning to refinance follow the same procedure in comparing lenders. Compare the options that do not impose an obligation to pay in advance. If you decide to refinance it, you'll be in a position to make the additional payments you want. But consider the costs of refinancing if the current loan has prepayment penalties. Use an to see whether it's a good fit to your budget. Calculate the cost as a percentage of your new loan amount to determine if refinancing is a good idea. If you're content with the terms of your loan negotiations to your present lender is an option if you don't want to refinance. You can request that additional installments to be applied to your principal, even if there is the prepayment clause. However, this isn't guaranteed. Most lenders won't modify a loan contract without good reason. Keep in mind some lenders don't have prepayment clauses but still make additional payments to the interest first. Reach out to your lender and ask them to let your money be put towards the principal. If there's no prepayment clause in place, your lender has to comply. The bottom line: Not all states permit prepayment penalties , and no lender will charge one on an over 60-month contract. But if your contract already has one it is possible to get around it. Begin by communicating the lender and asking them to allow payments to be applied differently. If that doesn't work, consider refinancing. Even with a penalty for prepayment, you may be able to save money 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 with over five years ' experience within personal financial planning. She's also employed full-time at the local library, helping her community access information about financial literacy, as well as other subjects. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers to take control of their finances with precise, well-researched and researched information that breaks down otherwise complicated topics into digestible pieces.
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