Which States Allow Auto Loan Prepayment Penalties?

Auto loan prepayment penalties are common in the United States, but not all states allow them. If you’re considering prepaying your auto loan, it’s important to know which states allow these penalties and how they can impact your finances.

Checkout this video:

Introduction

If you’re considering prepaying your auto loan, you might want to check if your state allows prepayment penalties first. Prepayment penalties are fees charged by lenders for borrowers who pay off their auto loans early. Currently, 27 states allow auto loan lenders to charge these fees: Alabama, Arkansas, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina – Puerto Rico – Virgin Islands – Washington. If you live in one of these states and are considering prepaying your auto loan, be sure to ask your lender about any potential fees first.

What is a prepayment penalty?

A prepayment penalty is a fee that some lenders charge if you pay off your auto loan early. The idea behind the fee is to compensate the lender for the interest they’re losing by you paying off the loan early.

Prepayment penalties are less common now than they used to be, but some lenders still charge them. You’ll usually see prepayment penalties on loans with terms longer than 36 months. If you have a loan with a prepayment penalty, it will be stated in your loan contract.

Most states have laws that regulate or prohibit prepayment penalties, but there are a few states that don’t have any regulations on the matter. This means that some lenders in those states are allowed to charge prepayment penalties if they choose to do so.

The following states have no regulations regarding prepayment penalties on auto loans:
-Alaska
-Arizona
-California
-Colorado
-Connecticut
-Delaware
-Florida
-Hawaii
-(There may be other states not listed here that also have no regulations on prepayment penalties)

If you live in one of these states and you’re considering taking out an auto loan, be sure to ask if the lender charges a prepayment penalty before you agree to the loan.

When can a lender charge a prepayment penalty?

In general, a lender may charge a prepayment penalty if you:
-Refinance with the same lender within a certain time period, typically within the first few years of your loan
-Get a new loan to pay off the balance of your current loan
-Pay off your loan in full before the maturity date

A prepayment penalty is usually expressed as a percentage of the loan amount. For example, if you have a $250,000 mortgage with a 3% prepayment penalty and you pay off the loan in full, you would have to pay a penalty of $7,500.

There are some circumstances when a lender cannot charge a prepayment penalty, even if your loan agreement says they can. You generally cannot be charged a prepayment penalty if:
-You are refinancing with another lender
-You are not able to afford your payments and are applying for a modification or other type of loss mitigation assistance
-Your loan is sold to another lender

Some states have laws that limit or prohibit prepayment penalties, so it’s important to check the laws in your state before you agree to any loan terms. The following states have laws that prohibit lenders from charging prepayment penalties: Alaska, Arizona, California, Colorado, Connecticut, District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland Michigan,, Minnesota,, Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

How much can a lender charge for a prepayment penalty?

Prepayment penalties on auto loans are only allowed in certain states. These states are:

-Alabama
-Arkansas
-Arizona
-California
-Colorado
-Connecticut
-Delaware
-Florida
-Georgia
-Hawaii
-Idaho
-Illinois
-Indiana
-Iowa
-Kansas
-Kentucky
-Louisiana Maine
-( Maryland does not allow prepayment penalties on auto loans) Massachusetts
-(Michigan does not allow prepayment penalties on auto loans) Minnesota Mississippi Missouri – (Montana does not allow prepayment penalties on auto loans) – Nebraska – Nevada – New Hampshire – New Jersey – New Mexico – New York – North Carolina – North Dakota – Ohio – Oklahoma – Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

What states allow prepayment penalties on auto loans?

Today, only a few states allow lenders to charge borrowers a fee for prepaying an auto loan. Most states have outlawed prepayment penalties, or put strict limits on when and how much lenders can charge for them.

The states that currently allow auto loan prepayment penalties are Arkansas, Connecticut, Illinois, Indiana, Iowa, Kentucky, Louisiana, Nebraska, Nevada, Oklahoma, Oregon, Rhode Island and Tennessee. In most of these states, the maximum prepayment fee that a lender can charge is 3% of the total loan amount.

If you’re considering financing a car purchase in one of these states, be sure to ask your lender about any prepayment fees that may apply. And if you’re already paying back an auto loan in one of these states and want to pay it off early, make sure you’re not being charged a penalty for doing so.

Conclusion

Based on our findings, it appears that auto loan prepayment penalties are more common in certain states than others. If you’re considering taking out an auto loan, it’s important to be aware of the laws in your state so that you can make an informed decision about whether or not to prepay your loan.