By John Campbell

Before you ever sign the dotted line on an auto loan you need to make sure the loan contract doesn’t include a prepayment penalty.

If you take out an auto loan with a prepayment penalty you’ll be slapped with a penalty fee if you pay off the loan ahead of schedule. Some lenders put prepayment penalties in their loan contracts to ensure they’ll recoup some of their lost profits on loans fully paid off in advance. The faster you pay off a loan the less profit you’ll generate for the lender through interest payments. Prepayment penalties are essentially punishing consumers who are responsible and pay off their loans ahead of schedule.

These penalties are usually charged at a flat rate or assessed as a percentage of the loan balance. The higher the penalty fees are, the less advantageous it will be to pay off your loan ahead of schedule. Even if you’re lucky enough to have a zero percent interest rate on your loan, you may want to pay it off before it’s due just so the debt isn’t hanging over you any longer. With a prepayment penalty, you’ll spend more on your loan just for the opportunity to pay it off early.

The easiest way to avoid a prepayment headache is to ensure there are no prepayment penalties written into your loan contract. Without prepayment penalties you’ll be able to save some money and have the freedom to pay off your auto loan on your terms.

© cashbuzz.com
John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.