What penalties will I face for prepaying a car loan?

I'm a freelance worker, so my income can vary wildly depending on how many projects I've got. If I earn a lot of money down the line and want to prepay on a car loan, what penalties will there be for me?

“Great question! Prepayment penalties are commonly assessed on car loans made to borrowers with poor credit. This enables the lenders to lock in a very high rate of interest for the life of the loan. These lenders either don’t let borrowers prepay or they charge penalties, often three to four percent of the outstanding balance of the loan.
Before you sign for a car loan, you should confirm whether it has a prepayment penalty and allows the borrower to prepay. Unless you have no other options, I recommend walking away from any loan offer with a prepayment penalty. There’s a decent chance that the big banks won’t penalize you for prepaying your loan.
If you are permitted to make prepayments with no penalty, be sure to mark them as “for reduction of principal” and follow up to make sure that your principal was reduced by the proper amount. Otherwise the money will be credited like a regular payment, including interest, which is what you’re trying to avoid. “
Jim Donaher
Answered on Apr 05, 2021
Jim Donaher is a freelance writer and manager with over 35 years' experience in the insurance, banking, and investment management businesses. He provides expertise on a range of topics and is able to explain complex industry information in layman's terms. Jim is the author of two books, including Call Him, He's Home: A Guide to Prayer for Regular People and Then Larry Smiled, a novel about life, death, accountability, and salvation. Taormina, Sicily is his happy place!

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