Car Loan Prepayment Penalty: What It Is & How to Avoid It

Unveiling The Penalty For Paying Off a Car Loan Early

Posted by on Nov 07, 2022 - Archived under Uncategorized

Have you heard the term Prepayment Penalty or ‘early repayment penalty’? Some auto loans include them in their terms and they can cause a little confusion among borrowers. Our auto loans team explains what they are and whether you should be concerned if the term appears in your contract.


A car loan prepayment penalty is almost what it sounds like. It isn’t prepayment, but early repayment. When you pay off a car loan earlier than the stated term.


Car Loan Prepayment Penalty


In most areas of life, paying something early is usually a good thing. The same as not having to borrow to buy something you want. In the financial world however, it isn’t so cut and dry.


Auto loans are usually a set amount of borrowing over a fixed period of time. The lender adds interest over that period to make their profit. Anything you do to interrupt or reduce that profit doesn’t go down too well.


That’s where car loan prepayment penalty or early repayment penalties come in.


Some lenders add these to your auto loan terms to ensure they get their money. Some auto loans have these penalties for the first year or two while others have them throughout the term.


Some auto loans don’t have them at all.


How to Avoid Car Loan Prepayment Penalties


You have a few options if you think you may repay your auto loan early. You can look for loans that don’t have these penalties or a loan that only has them for the first year or two.


These types of penalties should be clearly outlined in the auto loan paperwork made available before you signed. They should clearly state the term the penalty is active for and how much you would be required to pay.


If you’re shopping for a new auto loan and think you may repay early, make sure to request only quotes that do not include these penalties or only include them for the first year.


That way you have the freedom to settle early or overpay without being penalized.


If you are presented with an auto loan that has repayment penalties, you can negotiate with the lender to remove them. Some will offer a deal while others won’t. There is enough competition in the marketplace right now to ignore those lenders who won’t deal.


If you’re already in a loan with prepayment penalties, there’s nothing you can do. As you already signed the contract, you already agreed to be bound by those terms.


You will need to either keep the loan until the penalty period expires or keep it until the end of the term.


Whatever situation you find yourself in, prepayment penalties are best avoided wherever possible. If you don’t think you’ll pay off your auto loan early, you don’t necessarily have to worry about them.


If you want a little more flexibility in your finances, you should look for auto loans without them or with limited terms.


For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today


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