Auto Loan Prepayment Penalty Basics CarsDirect — Volkswagen Golf GTE

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Auto Loan Prepayment Basics

January 27, 2012

In financing atmosphere auto consumers need to understand a car prepayment penalty . There was a when the length of a loan at a comfortable 24 to 36 month period. The terms were fairly containing little, if any, fees, like prepayment However, traditional loans are now the backseat to a variety of creative which include terms prepayment penalties. Nationwide, penalties are allowed in 36 states and the of Columbia. This discourages from paying the loan off and allows the lender to collect all the

Does Every Loan Prepayment Penalties?

The simple to this question is no. Many have no penalty for early In fact, many car loans are so that you gain an advantage by the loan off early.

However, since the practice is common, it’s important you watch for these penalties. You be particularly vigilant if you have bad are being charged a higher average interest rate, or are out a loan for a large number of (4 or more). The penalties are less on loans of 24 to 48 months (2 to 4 years).

Prepayment Penalties

There are a of different ways a lender a prepayment penalty. One type is direct, and therefore easy to if you are aware of its existence and examine documents carefully.

These are penalties, which charge the a certain percentage of the balance on the loan if the borrower pays the off early. The amount of the penalty, would be lower the longer had the loan.

These penalties are allowed in 36 although they are prohibited the U.S. for loans longer 61 months (over 5 years).

penalties must be disclosed in the documents, in accordance with in lending practices, so read loan documents carefully and to sign any loan that a prepayment penalty. Watch for any of these phrases in the loan prepayment penalties, pre-computed full amount of interest.


Since percentage penalties are easy to identify, lenders use other techniques to the same purpose, but disguise it as else.

For example, some use the Rule of 78’s, which that all payments go to pay off the full of the interest calculated on the loan any payments are applied to principal. ensures that no matter how the loan is paid off, the gets the full amount of

Another technique that the same purpose is a pre-computed These loans calculate the amount of principle and interest the loan. The borrower agrees to pay the amount of principal and interest, of how quickly the loan is repaid.

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they are technically not prepayment these kinds of loans do you, by not allowing you to save paying off the loan earlier.

the Loans without Penalties

In to find loans that carry penalties, you need to ask for a interest loan. If a dealer or is offering any other type of it likely involves the Rule of or pre-computed interest, and is not the loan you

If you are offered a simple interest read the documents carefully, to sure there is no prepayment Remember that you cannot the word of a loan officer or that there is no penalty.


Many financing made at the dealer are with finance companies, where the transaction, including financing, the seller’s profit. To maximize profit, most dealer-originated deals include prepayment Check with other opportunities to discover agreements do not include prepayment penalties.

If All Fails

Try this method: If you saved or acquired a sizable sum you would like to use for paying off car loan, ask your lender for payout amount. For example, if prepayment penalty is set at 1 percent of the remaining balance of $10,000, the amount would be $10,100. don’t make a lump sum Instead, tell you lender you to make a principle only of $9,999. Find out how long the will take until it is to your account. Once ask for a payout calculation from lender. The new balance upon your payout calculation is will be the remaining 1-dollar plus any unpaid interest. your prepayment penalty of 1 will be extremely low.

If you have poor credit or a repayment history, you are more to be offered a loan with penalties or pre-calculated interest, so be careful if you fall into category. Read each of the documents yourself, and ask a legal if you have any questions.

Volkswagen Golf GTE
Volkswagen Golf GTE
Volkswagen Golf GTE
Volkswagen Golf GTE
Volkswagen Golf GTE
Volkswagen Golf GTE

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