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Are there penalties for paying off a car loan early?
I’ve gone through my finances and realized that I can pay off my car loan early. I want to do this, but will I face any surprise penalties?
Lauren Smith · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
The answer is sometimes. Some lenders charge what are called prepayment penalties, which are inserted into a
car loan
contract to prevent people from paying off their loans early. Prepayment penalties may be disguised by one of the following terms:- Rule of 78s
- Percentage penalties
- Precomputed loans
Even if prepayment penalties are in play, you may still find it worthwhile to pay off your loan early. This depends on your interest rates.
If the total interest you would end up paying exceeds the total prepayment penalties you would face, then you may want to pay the loan off early anyway.
If, however, the total prepayment penalties are more than your total interest or if you could turn a profit by investing your extra cash instead, you may want to hold off on paying your remaining balance now.
Also keep in mind that whenever you finish paying off your loan, your credit score will dip temporarily. If you have other big purchases coming up soon, you may want to continue paying on a normal schedule.
If you’re ever looking to free up extra cash, consider that you’re probably overpaying for your
car insurance
. Just use Jerry
to compare dozens of competitive quotes and find savings without sacrificing coverage.View full answer
- Gregory R.
WHY YOU CAN TRUST JERRY
Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.
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