What is an Auto Loan Prepayment Penalty?

When you set up a payment plan for the loan, the borrower and lender agree on a term of the loan. This means the loan will be paid off in a certain amount of months. The lender charges interest to the borrower, so the longer the term is the more interest the lender makes. That means, if possible, a borrower wants to pay off the loan early, but the lender does not want them to. This can result in the lender adding a prepayment penalty.

A prepayment penalty is when the lender requires the borrower to pay a fee if they pay off a debt early. This is so the lender can still make money if the borrower pays the loan off early.

If you plan to pay off your loan early, you want to avoid a loan with a prepayment penalty. A prepayment penalty would have to be in the contract, so read the contract entirely and don’t sign it if there is a prepayment penalty that you do not like.

To avoid the potential costs of a prepayment penalty, simply ask your bank or credit union about a contract with no prepayment penalty.

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