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What is car loan curtailment?
I was looking through my car loan agreement when I encountered an unfamiliar term: curtailment. What does “curtailment” mean and how does it affect my auto loan?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
First, you're smart for reading your loan agreement, because most people (inadvisably) ignore it. Second, "curtailment" means paying off part or all of your auto loan early.
While it's more common in mortgage contracts than vehicle loans, the principle is the same. Here's how it works:
- The principal is the amount of money you borrow when you finance a car.
- For every auto loan payment you make, you reduce your debt,and pay interest charges based on your remaining principal.
- When you increase the size of your auto loan payments, you pay off the principal faster and pay less interest overall.
Since interest is what banks and credit unions charge for lending money, some institutions don’t like it when you pay your loan early. Before making extra payments, read the curtailment section (or call your financier). If you close early, you could incur a
car loan prepayment penalty
between 2-4%.View full answer
- Gregory R.
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