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 choices by providing you with interactive tools and financial calculators that provide objective and original content, by enabling you to conduct research and analyze data for free to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, 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 may impact how and when products are featured on this site, including such things as the sequence in which they appear in the listing categories in the event that they are not permitted by law. Our loans, mortgages,, and other products for home loans. This compensation, however, does not influence the information we provide, or the reviews appear on this website. We do not contain 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. Written by personal and Business Finance contributor Kellye Guinan is an editor and writer on a freelance basis with more than five years of experience in personal financial planning. She is also employed full-time at the local library, where she assists people in her community gain access to information on financial literacy, as well as other topics. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to control their finances through providing concise, well-researched and well-documented information that breaks down complicated subjects into digestible pieces. The Bankrate guarantee

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You have money questions. Bankrate can help. Our experts have helped you understand your money for over four decades. We continually strive to give our customers the right guidance and the tools necessary to make it through life’s financial journey. Bankrate adheres to a strict code of conduct , so you can trust that our content is truthful and reliable. Our award-winning editors and reporters produce honest and reliable content that will help you make the right financial choices. The content we create by our editorial team is objective, factual and is not influenced from our advertising. We’re open about how we are able to bring quality information, competitive rates and useful tools for you , by describing how we earn our money. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products and, services, or when you click on specific links on our site. So, this compensation can affect the way, location and when products appear in listing categories in the event that they are not permitted by law for our mortgage or home equity products, as well as other products for home loans. Other factors, such as our own rules for our website and whether the product is available within the area you reside in or is within your own personal credit score can also impact the way and place products are listed on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit item or product. A penalty for late payments can keep you from saving money on interest. A lot of lenders offer itbut it’s becoming more rare, however you can ask for modifications to the way payments are handled. Refinancing is also an option, however, you will need to pay a cost to get out of the current contract. What a prepayment clause is The prepayment clauses outline the time and manner in which the borrower may pay off a loan. Certain clauses may include an early payment penalty, a fee for paying off a loan earlier or making additional payments. This is particularly prevalent with auto loans which use precalculated interest. You may be entitled to some sort of rebate or refund, but it won’t cover the full amount of interest you paid. Prepayment penalties make it difficult to reduce the principal amount . And if the loan has a high interest rate, you’ll be paying a large amount to your lender and not be capable of reducing the amount. Since the value of cars decreases so the more you have to pay in interest the more likely to end up . Prepayment clauses impact the auto loans The two major ways prepayment clauses impact your . It is possible that you will not be able pay principal down. A prepayment provision might make it difficult to pay the principal down. Instead, the additional amount goes toward your next payment. It can help in a pinch by lowering the total amount you pay monthly, but you’ll still end up paying a large quantity of interest. The process of refinancing can be more challenging. A prepayment clause may include a prepayment penalty that could cause refinancing to be more costly as it is 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 do you get rid of prepayment penalties on auto loan prepayment penalties It’s possible to avoid prepayment penalties on your auto loan. However, the method of avoiding them depends on what you’re trying to accomplish. If you are seeking a loan Talk about penalties for early payment with your lender. You should be aware of the penalties up in the beginning. Many lenders — including banks and credit unions — don’t have prepayment clauses in their contracts. You can avoid a lot of hassles in the future by checking this before you take out an loan. If you’re planning to refinance follow the same procedure when comparing new lenders. Compare alternatives that don’t impose a prepayment clause. Once you refinance it, you’ll be in a position to make any additional payments you want. But consider the costs of refinancing in the event that your current loan is subject to an early payment penalty. Utilize an application to determine whether refinancing is a good idea for your budget. Calculate the fee as part of your new loan amount to determine if refinancing is a good idea. If you’re happy with your loan negotiation 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 there is a prepayment clause. However, this isn’t guarantee. Most lenders won’t alter the terms of a loan contract without justification. Keep in mind certain lenders don’t have prepayment clauses but still make additional payments to the interest first. Reach out to your lender and ask that your money be transferred to the principal. If there’s not a prepayment clause, your lender is required to adhere. The bottom line is that not all states allow penalties for prepayment — and no lender is able to charge one for a over 60 months. However, if your contract has one, there are ways to overcome it. Start by getting in touch to your lender and asking them to allow payments to be used in a different way. If that doesn’t work, think about refinancing. Even with a penalty for prepayment, you may be able to save money on interest throughout the term of your car loan. Find out more


Written by Business and personal finance writer Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial planning. She also is a full-time worker at her local library where she helps the community gain access to information on financial literacy, as well as other subjects. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers to take control of their finances through providing concise, well-researched, and well-structured information that dissects complicated subjects into bite-sized pieces.

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