How to Avoid Prepayment Penalties
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 from the money manager. 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.