Is There a Prepayment Penalty on Car Loans in California?

Many individuals obtain car loans for vehicle ownership. Understanding the implications of early repayment, especially regarding associated fees, is an important financial consideration. This knowledge helps borrowers make informed decisions about their automotive financing.

Prepayment Penalties in California Car Loans

A prepayment penalty is a fee charged by a lender if a borrower pays off a loan before its scheduled term ends. California law generally prohibits lenders from imposing prepayment penalties on simple interest car loans. This prohibition is established under the Rees-Levering Automobile Sales Finance Act, which governs retail installment contracts for vehicles in the state.

This legislation protects consumers, allowing them flexibility to manage finances without fear of extra costs for early repayment. Consequently, if your car loan in California is structured as a simple interest retail installment contract, you should not face additional charges for paying it off early. This regulation applies broadly to the majority of standard car financing agreements offered by dealerships and financial institutions.

Interest Calculation on California Car Loans

Car loans in California are typically structured using the simple interest method. This means interest accrues daily based on the remaining outstanding principal balance of the loan. Each payment made first covers the accumulated interest since the last payment, with the remainder reducing the principal amount.

When a borrower makes extra payments or pays off the loan early, the principal balance decreases more rapidly. Since interest is calculated on this reduced principal each day, less total interest accumulates over the life of the loan. This characteristic inherently rewards early repayment by reducing the overall cost of borrowing.

Process for Early Loan Payoff

To pay off your car loan early, contact your lender (bank, credit union, or finance company). Request a payoff quote, which provides the exact amount required to close your loan account on a specific date. This quote includes the remaining principal balance plus any interest accrued up to the designated “good-through” date.

Lenders often provide several convenient methods for obtaining a payoff quote, such as through their online banking portal, a dedicated phone number, or by reviewing your monthly statement. Once you have the accurate payoff amount and its valid date, you can typically submit the final payment electronically, by mail, or in person. Confirm that the payment clears by the “good-through” date to avoid any further interest accrual.