Dear Driving for Dollars,
I have been paying extra money on my car loan every month in addition to my monthly payment as a way to pay down the principal and save money on interest. I’ve done this with my home mortgage and it has worked well. The only problem is I just discovered that my bank won’t do this for my car loan and is just applying the extra money to future payments. Should I try to refinance with another bank, or is this standard protocol for car loans?
Many car loans have a prepayment clause that prevents customers from reducing the interest that is scheduled to be paid over the length of the loan at the terms in your contract.
Look through your car loan documents to see if there is such a clause. If there isn’t, you can request the bank take the additional amount you’ve paid and apply it to the principal. They may not be happy about it, but unless there is a prepayment clause, they are obligated to do this at your request.
If there is a prepayment clause, then take comfort in knowing that you are prepaid a bit on your car loan. This could afford you to take a break when other bills are higher, such as after the holidays. You may owe less on your car loan when you go to sell or trade your car for a newer model, essentially giving you a larger down payment on your next car.
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