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.

thank you

If there is No Prepayment Penalty does that mean I can make principal only payments and not pay the interest that would have accrued? For example-If I pay $5000 principal only payment and the balance is $15,000 the new balance should be $10,000.

If a borrower pays off the entire debt early, a bank or finance company might require a borrower to pay a fee called a pre-payment penalty.

hi ... i paid a settlement amount for my car loan not even 1 year.. should I still received a rebate of the interest of 4 yrs.

Read your loan documents to see what the terms are for this situation.

Of you miss a payment, can that bank or finance company take or force you to make a double payment?

Read your loan documents and talk with your lender about this situation. If you're having trouble making payments, contact the lender.

I found a car for my next 3 year lease. I told the dealer I still had 2 monthly payments left for my first lease with a different dealer and the dealer said that is okay we will give you the $400 for your last two payments. I paid a down payment of $3,500 and started making my $209 monthly payments for the second lease. I used two of my own checks to pay the final first lease payments. Now the first dealer wants $1,600 for the first car he supposedly sold at auction for much below the value of the car with 23,000 of the allowed 36,000 miles for the three years. The second lease has no penalty for paying off the lease early but the dealer had a hard time verifying that using the lease document. The first lease dealer told me the second dealer should have informed me there could be a penalty for the first lease rather than just giving me the $400. Doesn't a dealer have a code of ethics?

You should get a copy of the lease every time you lease a car. The charges and penalties you're responsible for depend on the terms of the lease. Read it carefully, and if you think the dealer did something that doesn't agree with the lease, talk with the dealer.

If the finance document don't have a prepayment penalty cause, then can I pay off the loan early without a prepayment penalty even if the contract is for 60 months?

In general, even if your contract allows you to make extra payments, there may be a special process to do so.

Before you send 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. 

This FTC article about vehicle financing has information about your state and federal protections. You may need to review your financing contract with your lender, financial advisor or lawyer to understand your payment options.

The bank that financed my auto was bought out by another institution. 3 years into deal I received an actual statement that showed the interest due was about twice what simple interest would calculate out. Finally received a 15 month summary that shows low interest amount some months and much higher amounts other months. The mean value should have been about 20 dollars but actuals ranged between 12 and 28. It may come out in the end but it seems the financier is calculating daily. No payments ever late. So the question is can the interest paid exceed the finance charge specified in the original contract?

This FTC article about vehicle financing has information about your state and federal protections. You may need to review your financing contract with your lender, financial advisor or lawyer to understand your payment options.

"Simple" interest is not quite so simple. Auto loans are amortized, meaning that interest will make up a bigger portion of your monthly payment at the start of your loan. That's because your interest rate is multiplied each month by the total principle owed. So your monthly payment stays the same, but you're paying more interest at the start, and over time a bigger portion of your monthly payment will be going towards the principle balance. Search online for "amortization calculator".

I would guess that most people do not even understand how interest rates actually work and are paying a lot more in interest than they realize. I hope this helps.

I sent a principal payment on a camper loan to Bank of America for $1000. I contacted the company to ensure I followed their specific instructions on how to make the payment. I was then charged a finance charge out of that principal payment. I believe they are in the wrong as I always understood that a principal payment purely reduces the principal owed and that they shouldn't take a finance charge out of it also. They also then indicated on my statement that I don't owe a payment until August now. I believe I need to contact the company to rectify this. Would you agree?

If you have questions about your payments it makes sense to contact your lender.

I live in California and wanted to know if I can make principle only payments if I am behind on my car payments? I recently lost my job and I am disabled and struggling to make my high car payment each month, so it has been late.

When you have questions about making payments, start by contacting your lender. You can look at the financing contract you signed when you borrowed money to buy your car. It will also have information about payments.

I got tricked into a "simple finance charge" auto loan. The auto dealer didn't even show me the truth in lending disclosures before he made me sign an automated screen. Now I want to refinance with another bank at a much lower rate. The contract says" your finance charge, total of payments and total sale price will be more if you pay late and less if you pay early." It also says I can prepay at any time without penalty (even though the dealer said I would be hit with a 5% penalty) "If you do so, you mustpay the earned and unpaid part of the Finance Charge and all other amounts up to the date of your payment". Does this mean I have to only pay the part of the $3200 finance charge earned to that point or do I have to pay the whole thing?

When you have questions about making payments and the terms of your contract, you can contact your lender or a financial professional or lawyer who works on contracts.

 

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