Financing a car? Ask about pre-payment penalties.

If you’re in the market for a new or used car, you may be considering financing options. For example, you might get a loan from a bank or use dealership financing. In either case, you’ll have to sign a contract that specifies the terms, including how much money you owe and what your payments are.

row of carsRemember that the terms of this contract have a big impact on the total cost of the car. For example, a five-year contract may have lower monthly payments than a three-year contract. But your total cost will be higher. Use this worksheet to compare offers with different terms.

When considering a contract, here’s one question that’s well worth asking: Can I pay off the debt early without paying a penalty? The answer depends on how the contract is structured. Before signing any paperwork, it’s important to know if the terms call for simple interest or pre-computed interest.

  • Simple interest is calculated based on the amount you owe: The quicker you pay it off, the less interest you’ll pay.
  • Pre-computed interest is a fixed amount, calculated and added at the beginning of the contract. Even if you pay it off early, you still pay the interest in full. If a refund or rebate of interest is included in your agreement, you may get back some of the interest you paid — but not all of it.

Pre-payment penalty is another term to watch for. Banks and finance companies sometimes require borrowers who pay off a debt early to pay a fee.

When negotiating terms, ask about a simple interest contract with no pre-payment penalties. Shop around and compare offers from dealerships with offers from banks or credit unions.

And remember that even if your contract allows you to make extra payments, there may be a special process to do so. Before sending any extra money, contact the company’s customer service department and ask about the process for making a principal-only payment. Otherwise, your extra payment might not be credited properly to your account.

Be sure to make your scheduled payments on time until you have paid for the car in full. Making payments late has consequences: late fees add up and late payments can affect your credit. When you believe you’ve paid every dollar you owe, ask for a written statement that says so.

Tagged with: car, loan
Blog Topics: 
Money & Credit

Comments

Is the original loan company obligated to refi the vehicle Ifmrequested?

Oh yeah? What if the product manufacturer keeps damaging the product constantly even though you've made payments as long and as often as possible? Doesn't that kind of void the contract, especially when you know longer are the possessor of the product? This doesn't mean you agreed to transfer ownership. I'd say big money back is deserved in that case, because the product manufacturer ought to have terms to live up to as well!

This is a very compact article on car financing.

The financing issued on cars to east to buy cars for middle class families also.The financing of cars is very benifit to middle class families.Increase loans on cars to develop car sales

Why do some car companies have blackout dates which pushes you into being late with your payments?

Yeah, you ain't kidding about the prepayment penalties, because I once got a loan from buyherepayherelistings.com for $7,000 and the only thing I wanted to do is refinance the remainder balance of $2351.00 that I owed from only a 2 year loan. They told be that I needed to pay a prepayment penalty that amounted to $2500. I was shocked that I just want to reduce the remaining 12 mos of interest however I had to pay double to avoid it. I cancelled the refinanced and ended up paying an additional $500 i interest because I had to wait it out for the rest of the time I had on the 3 year term.

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