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.
Simple vs precomputed interest
Two methods for calculating loan interest that determine whether paying off your loan early actually saves you money.
Payoff quote, explained
The exact amount required to own your financed car outright, including interest accrued through a specific payoff date.
Loan-to-value (LTV)
LTV is the ratio of your loan balance to your car's current market value, expressed as a percentage.