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


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 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.

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