Many borrowers mistakenly think they can pay off a loan early; after all, the lender would be getting paid sooner. However, when a loan is paid off early, much of the interest the lender would have charged is no longer applicable. The lender stands to lose money if you pay off your loan ahead of time. If you want to pay off your loan before it is due, you may have to negotiate a deal with the lender.
Background
When you get a loan quote, the lender uses the terms you request to determine your interest rate. For example, if you request a five-year loan, the lender will adjust an interest rate over that period of time. The longer your loan, the higher the interest rate. The lender is factoring in inflation, the cost to tie up capital and other considerations. When you suddenly change one of the terms by paying off the loan early, the lender may actually be left with a lower profit.
Regulation
Most lenders will charge a premium if you want to repay your loan early. This premium may be lower than the cost of paying off the loan over time, but it will be higher than the flat payment for the remaining principal on the loan. In some cases, you may find repayment is extraordinarily high; this may occur if you have a balloon loan. With this loan, your initial payments only went toward interest until all of the interest for the entire loan cycle was repaid. Only at this point did your payments apply to principal. This means, even if you repay your loan early, you are responsible for the entire cost of interest over the life of the original loan. In some states, balloon loans are considered predatory and are therefore illegal.
Process
To negotiate to payoff your car loan, start by requesting a quote from your lender. This quote will reflect your principal debt remaining plus a payoff fee. This fee should be lower than the total cost of interest you would owe if you paid off the loan on schedule. If it is, consider accepting the quote and paying off the loan. If the cost is actually higher, meaning you are being penalized for paying off your loan early, you will want to negotiate for a lower quote.
Bargaining
Unfortunately, you have little bargaining power when it come to negotiating a loan payoff. You signed a legal contract when you took your loan, and your lender is under no obligation to modify this contract. Consider offering the lender a payment lower than the payoff quote but higher than the remaining principal balance. This would be the quintessential "win-win." You would save money by paying off the loan early, and the lender would still make a profit. If you are offering this option, consider explaining why. For example, if you are leaving the country or going back to school, the lender may be enticed to accept your offer now before your ability to pay changes.
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