← Back to Glossary
Prepayment Penalty (Car Loan)
Definition
A fee charged if you pay off a car loan before the end of its term.
Explanation
Prepayment penalties on car loans are less common now but some lenders still charge them. The penalty may be a flat fee or a percentage of the remaining balance (typically 1-2%), usually applying only in the first few years.
Always ask about prepayment penalties before signing. If you plan to make extra payments or pay off early, a no-penalty loan is essential.
Example
Car loan has 2% prepayment penalty within first 2 years. Pay off $20,000 early = $400 penalty.