Prepayment penalties
Some lenders charge a penalty for paying off a car loan early. The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won't pay any more interest, but there could be an early prepayment fee.
They may be calculated as a percentage of the remaining loan amount — typically 1 to 2 percent. The penalty could be equal to a certain number of months' interest. Or some lenders may charge a flat fee. The prepayment penalty details will be detailed in your loan agreement.
Paying off a car loan early can save you money on interest and improve your debt-to-income ratio. Early loan pay-off can also give you ownership of the vehicle sooner and reduce the risk of being upside-down on the loan. Before deciding to pay off your loan early, consider if your money could be better spent elsewhere.
You could save interest and free up room in your budget by paying your auto loan off early. There are several options available — including refinancing, paying biweekly and rounding up payments, just to name a few. Confirm your lender doesn't charge a prepayment penalty since the cost could be more than what you save.
Percentage-based fee: Your personal loan prepayment penalty could be a percentage of your loan balance. Let's say that your lender charges a percentage-based prepayment penalty fee of 5%. You also have $5,000 left on your loan. In that case, your prepayment penalty would be $250 (because 5% of $5,000 is $250).
Extra payments made on your car loan usually go toward the principal balance, but you'll want to make sure. Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want.
Key Takeaways
Paying off a car loan early can save you money in interest in the long term. When you pay off a car loan early, you also reduce the total amount of money that you owe, which may boost your credit score. Some lenders charge prepayment penalties that can offset what you would save in interest.
On average, a new car buyer with an excellent credit score can secure an average interest rate of 5.25%, but that average jumps to 15.77% for borrowers with poor credit scores. For used car buyers, those averages range from 7.13% to 21.55%, depending on the borrower's credit history.
Negotiate with your lender
Some lenders may be willing to negotiate with you to reduce or even remove the prepayment penalty, but you'll need to call and ask. They may be more likely to negotiate if you've made your payments on-time every time.
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.
This penalty is charged to offset the loss in interest income caused by early repayment. The prepayment charges may vary from bank to bank. Though there are additional charges associated with pre-closure, it could sometimes work to the advantage of the borrower.
Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.
Sell the Car
One way to get out of a car loan is to sell the vehicle privately. If you're not upside down on the loan, meaning the car is more valuable than what you currently owe on it, you can use the proceeds of the sale to pay off the current loan in full.
A sliding scale based on the years remaining on the loan.
In most cases, the prepayment penalty starts at 2% of the outstanding principal balance for the first two years and then decreases to 1% in the third year. This means the longer you wait to pay off your mortgage within the set period, the lower your fee will be.
Some may have a prepayment penalty — a fee for paying off a loan early or making extra payments. This is especially common with auto loans that use precomputed interest. On average, the penalty is about 2 percent of your outstanding balance. So, if you have $7,000 remaining, you would have to pay $140.
Because the interest amount for each month is calculated based on the loan principal balance, you will pay the most interest early in the loan's life span. Paying off your car loan earlier in the term will save you the most interest, but paying it off at any point can save you a lot.
In addition, when you pay off a car loan, your credit mix changes because you now have one less account in your name. This change can lead to a drop in your credit score. Let's take a closer look at factors that affect a credit score and how paying off a car loan can impact them.
You'll pay less interest overall.
If you have a 60-month, 72-month or even 84-month auto loan, you'll pay quite a bit in interest over the loan term. As long as your loan doesn't have precomputed interest, paying extra can help reduce the total amount of interest you'll pay.
Here are some important points to consider when getting into car payments. So, When Is a Car Payment Too High? According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense!
You can pay off the outstanding car finance at any point, but remember that if you haven't yet paid for 50% of the car, you'll have to make up the difference to be able to hand it back.
A prepayment penalty is only allowed during the first three years after the loan is consummated. After three years, a prepayment penalty isn't allowed. (12 C.F.R. § 1026.43(g) (2024).)
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
If you pay off the personal loan earlier than your loan term, your credit report will reflect a shorter account lifetime. Your credit history length accounts for 15% of your FICO score and is calculated as the average age of all of your accounts.