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?

Answer
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.
Lauren Smith
Answered on Nov 15, 2021
Lauren has written for World Nomads, the Matador Network, Korvia Consulting, and once upon a time Three Fates Games. She graduated from Columbia College of Chicago with a BFA in Creative Writing. After graduating, she moved overseas and lived in South Korea where she spent her free time traveling and going on road trips with friends. She misses the rest stop potatoes and is trying to figure out how to recreate them at home. She's now based outside of Chicago and when she's not writing she spends her free time reading, playing video games, and exploring whenever she can.
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