How to Avoid Prepayment Penalties
By Mrs Money on March 24, 2009 – 7:21 pm -
A few weeks ago, my friend Kacie was talking about how she’s changing up her plans on paying her car loan off early. She was saying that she’d have to pay a 1% “prepayment penalty” for paying off the loan early. I was so excited when I realized I could help her save that money instead of paying it. I hate that banks charge clients for paying off loans early. That just seems so backwards to me. Every time I get to the prepayment penalty line during a loan closing, I explain to my clients how they can get around the prepayment penalty.
Here’s how you can do it. Say you’ve got enough money saved to pay off your loan in full. The bank you’re using charges a 1% prepayment penalty. Your remaining balance is $10,000. If you go to the bank and ask for a payoff amount, they are going to tell you somewhere in the ballpark of $10,100. ($10,000 principal balance plus 1% prepayment penalty) It will probably be a little more because of unpaid interest that hasn’t been billed yet. Instead of making a lump sum payoff, break it down.
Ask to make a principal only payment of $9,999 or something close to that amount. Make sure you find out how long it takes for the payment to post. At my bank it’s usually overnight. The next day, go in and ask for a payoff calculation. Your new balance is going to be around $1 plus any unpaid interest. When the teller gives you a payoff, the prepayment penalty is going to be a penny! (1% of $1) Awesome! Make sure you share with your financial savvy friends!
And that’s how you avoid a prepayment penalty! I hope I’ve explained that well enough. Please let me know if something’s not clear.
Posted in Banking, Loans | 16 Comments »
March 24th, 2009 at 10:43 pm
That’s a great idea, however, I can’t see why anyone would take out a loan with a prepayment penalty in the first place. There are always options to doing that…
[Reply]
March 25th, 2009 at 9:03 am
Interesting, I never would have thought of it. I didn’t know car loans sometimes came with a prepayment penalty, I know they are common with mortgages. I paid my car off early and fortunately there was no penalty.
[Reply]
March 25th, 2009 at 4:56 pm
[...] delicious Valentine’s Day dinnerAbigail on No bailouts for people who can pay their mortgagesHow to Avoid Prepayment Penalties | The Ultimate Money Blog: Saving Green and Living Green! on Car loan change of plans — againLIsa on That one time I was on The Price is RightSonyaAnn [...]
March 30th, 2009 at 9:55 am
[...] Good morning! Today’s edition of the Carnival of Personal Finance has been posted at Wide Open Wallet. This edition features a number of world record holders. Here are the highlights, selected by Ashley, the host: How to Avoid Prepayment Penalties [...]
March 30th, 2009 at 12:04 pm
I have never seen a loan with a prepayment penalty (but it’s been a long time since I’ve had a car loan ). But this is a great thing to look out for – A) maybe I can make negotiate not to have it or B) know what to do just in case.
Thanks again!
[Reply]
March 30th, 2009 at 5:28 pm
Apparently it’s illegal in my state to have a prepayment penalty on a car loan. Can’t argue with that!
[Reply]
March 30th, 2009 at 5:49 pm
[...] to Wide Open Wallet for the Carnival of Personal Finance, where Ashley was kind enough to include my post, How to Avoid Prepayment Penalties, in the editor’s picks! Thanks so [...]
March 31st, 2009 at 9:03 am
[...] How to Avoid Prepayment Penalties [...]
March 31st, 2009 at 7:33 pm
Deirdre- That’s totally true! Unfortunately, at my bank there are no loans without prepayment penalties. It’s crazy!
Miss M- I am glad you didn’t have one!!
rosemarie- I make sure that my customers are fully aware of it and how they can get around it before they sign the loan docs. I’d feel so bad if I didn’t explain it!
Slinky- That’s awesome! I personally think it’s silly for banks to charge people for being good customers and paying it off early, but of course the bank looks at it that they are losing that extra interest.
[Reply]
April 3rd, 2009 at 4:04 am
[...] How to Avoid Prepayment Penalties [...]
April 8th, 2009 at 9:22 am
Hey, what a nice idea to save up the money. I think banks are too business minded and always think some ways to charge us. Lucky we have a creative people like you to help us overcome this prepayment penalty. I will use this next time I want to pay off my mortgage.
Last but not least, thanks for the idea. I really appreciate it.
[Reply]
April 8th, 2009 at 7:24 pm
Harrison- Thank you so much for your lovely comment! My mortgage doesn’t have a prepayment penalty so you may want to check with yours as well. Thanks again!
[Reply]
May 6th, 2009 at 1:37 am
[...] a cool way to get around this. Mrs. Money taught me that I can pay almost all of the balance, leaving it around $1 or so. Then, I’ll owe a 1% [...]
August 15th, 2009 at 3:57 am
Can you guys believe it’s as high as 5% in India. No partial repayments allowed so your idea won’t work
tsk tsk (I mean on car loans).
Have posted a blog on mine. Do let me know your views on that.
Cheers!
[Reply]
Mrs Money Reply:
August 17th, 2009 at 9:48 pm
Wow, that sucks! I don’t think it’s fair that they charged you after you were not an employee any more. At the bank I work at, once you have signed the contract, the terms don’t change. For instance, I got a .25% discount for using automatic payments. I stopped that, but my rate didn’t go up. Crazy!
[Reply]
December 12th, 2009 at 6:47 am
Have a valid paypal account?
Want to earn extra $100?
You can earn up to $100 just by inviting your friends and relatives to join paypal’s wishlist
visit http://bit.ly/8OniBb for more info
this is not a scam. you dont have to buy or pay anything for this.
all you need to do is to create your wishlist for this christmas..
again its… http://bit.ly/8OniBb
..this promo is until dec31,2009 only. so hurry up.
thanks and god bless.
[Reply]