Am I able to pay out my loan early?

16 Jan 2017

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Are you able to payout your loan early? What are the consequences?

If you have a consumer loan, lenders are required to explain in either their loan contracts or terms and conditions any fees and charges involved in paying your loan out early, along with all the other features of your loan, such as interest rate, establishment fees, origination fees and any other charges and ongoing fees.

It is also a requirement to explain how the interest is calculated on your loan and with most fixed rate car loans; interest would be calculated on the daily balance, charged monthly in arrears. What this means is the interest component would be calculated on the balance for that day, so in any given month, the interest is calculated on the outstanding balance of your loan every day and then added up over the month to calculate your monthly interest payable, so any additional payment would reduce the outstanding balance and interest payable on that given day and for the days moving forward.

What this also means is that when you pay your loan out early, any outstanding interest from that day moving forward, would not be payable, which would mean that you have only paid your interest for the time that you have kept your loan active. Due to most car loans having fixed interest rates, they have agreed contractually with you for the period you have accepted to take the loan for. If you ‘break’ the loan early, to recover any costs the lender may lose, in most cases with most lenders there would be some kind of early exit fee.

The car loan early exit fees with most of the major lenders are not as significant as any fixed rate home loan break loan costs and that would be due to being priced into the interest rate from the start and the average amount financed being substantially less, meaning any loss would also be much less.

Car loan early exit costs are usually a set amount that reduces the longer you keep the loan and may have a small discharge fee, but in most cases with most lenders, the early exit fees, including any discharge fees would only be in the hundreds where you would save on the outstanding interest and you’ll still have the benefit in locking down lower fixed interest rates over the full term of your loan contract.