Prepayment penalty
A fee some lenders charge if you pay off your auto loan early or refinance before a set date.
What it means
A prepayment penalty is a fee written into your loan contract that you owe if you pay off the balance before the scheduled maturity date. The penalty can be a flat dollar amount, a percentage of the remaining principal, or a set number of months of interest. Most modern auto loans in the US do not carry prepayment penalties, but some subprime and buy-here-pay-here lenders still include them, especially on longer terms.
Why it matters
If your contract has a prepayment penalty, refinancing or selling the car early can wipe out any interest savings. A 2% penalty on a $20,000 balance costs you $400 the moment you pay off the loan. That can turn a seemingly great refi offer into a money-losing move. Even if you plan to keep the car for years, life changes, and you want the flexibility to sell, trade, or refinance without a tax for doing so.
What to do
Pull out your loan contract and search for the words "prepayment" and "early payoff." If you find a penalty clause, note the exact formula and any expiration date. Then plug your loan details into our refinance verdict tool, which accounts for prepayment penalties when calculating whether a new loan saves you money.
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