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What does a car loan prepayment penalty mean?

I was going to pay off my car loan or try to pay it down, but my lender said there's a prepayment penalty. What does that mean?

Eric Schad · Updated on Dec 10, 2021

Reviewed by Shannon Martin, Licensed Insurance Agent.

It’s great you’re trying to pay off your debt, but it’s also good you checked with your lender first. A

prepayment penalty is a fee that lenders put on a car loan to deter you from paying it off. By doing so, the lender can collect the full amount of interest and maximize their profitability.

Generally speaking, the

prepayment penalty

is between 2% and 4% of the outstanding balance of the loan. Call your lender to get the exact amount and then compare this to how much interest you’ll pay. Doing so will help you determine whether paying off the car early is worth it.

If the prepayment penalty is too high, consider your refinancing options. Refinancing your auto loan can reduce the interest on it. Have all of the resources needed to refinance your auto loan in one place with

. Jerry is an app that connects you with top lenders in minutes.

MORE:

How to refinance a car

View full answer

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