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.

The question wasnt answered they just want to know if there is no penalty can the person pay towards the principle

To answer specific questions about your loan, please talk with your lender and review your loan terms.

How much?

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.

Hi there, I have a question. I had an auto loan with SNAP financial. It was a 72 month term. I paid all the 16 monthly payments since I took out this loan. I refinanced my mortgage and threw the car loan in the mix to get it paid off early...thinking I was going to save myself thousands of dollars in interest. To my shock and dismay SNAP made me pay all the calculated interest and principal of this loan, with absolutely no savings. I paid 13,500 for the car, paid off 11,200 in the first 16 months of the loan and not one dime went to paying off the principal. Is this legal? The total cost of this loan was over 27,000 dollars, basically doubling cost of the car and or calculates as a 50% interest loan. I feel I have been raped by these people? Do I have legal recourse here? You can email me directly at         if you like

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 have the same question. If no payment due and i send one anyway, should be no finance charge.....

unfortunately it doesn't work that way, any day until you have a $100 for example loan with the bank, the bank will charge you interest per diem until the loan is paid of fully. So, for $100 if you are charged say $5 for 30 days now your loan amount is $105 and you pay off $50 (which is way more than your installment) fine now your loan amount is $55. So, say next month you pay another $50 while you are charged a $2.5 interest this time for that $55 loan amount with the bank. So, $55+$2.5=$57.5, $57.5-$50 your payment, you will still have a $7.5 loan amount to pay on the third month. In all this calculation your standard installment was just say $15 but you pre-paid $50 every month. Bottom line is bank will always charge you the interest for the remaining loan amount and so you will end up paying less interest for the pre-paid amount. There is nothing like Principal Payment for the banks.

Got this after long calls with a leading bank as a auto loan customer :)

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.

I think there should be a clearly defined term for these things. A credit union web site clearly states there is NO prepayment penalty fee with their auto loans. But after applying and being approved, the Truth in Lending Disclosure states, down on the bottom in a messy clustered paragraph, that if you pay off your loan early you will NOT be entitled to part of the finance charge. So not only is there a prepayment penalty, it doesn't even tell you how much it will be or how they calculate it. That sure sounds like a prepayment penalty, even if they happen to not call it that. (Do words mean anything anymore?) Nice that I saw this before accepting the loan, of course. Glad the Truth In Lending Disclosure is mandated! But would be nicer if there were actual terms agreed upon, so that their web site couldn't claim no prepayment penalty fee just because that's not what they happen to call it.

I bought a 2009 truck at a used car lot and I traded in my 2004 truck and paid 1500 cash down who wrote the contract up as I paid 6000 cash without a trade in. When I want to make my first payment I noticed that on $375 payment only $94 went towards the truck so he didn't give me any paperwork when we did the deal I asked him for my paperwork so I can see what type of Interest he was charging me and he's charging me 28% interest on the amount that I finance which was $9,828 and in Florida is there a cap on the amount of Interest they can charge you if so and he's charging me 28% interest what can I do. I don't want to come taking my truck cuz he done took my one and then sold it the one I trade it in

You can report this to your state Attorney General.

Hello, If I am in the middle of an early termination of a lease.... that is to say I am waiting for be notified the full amount I owe leasing company for fees and the auction price difference to honor my full paying off of the lease contract.....then I am prevented from shopping around for another vehicle.

In other words, does one need to wait for an early termination to be fully resolved to purchase a vehicle (not leasing but through a dealer)?

Can you make a 12 month payment in advance with a 2 year contract?

Your payment options may depend on what's in your contract.

I WAS TOLD I WAS APPROVED FOR REFINANCING MY CAR AND THEN I GOT A CALL BACK SAYING I WASNT APPROVED BECAUSE I WAS UPSIDE DOWN ON MY LOAN AND TOO MANY OPTIONS ON MY CAR WHAT CAN I DO?AND I TALK TO SUPERVISOR THAT TOLD ME ALL THIS BUT AND SHE SAID AGIN THAT I WAS APPROVED BUT THE OPTIONS MADE THEM NOT GIVE IT TO ME AND BEING UPSIDE DOWN I'M CONFUSED PLEASE HELP??

If the lender will not approve your refinancing now, you could ask the lender what to do so they will approve refinancing in a couple months. Or, you could find a different lender.

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