How do pre-closure or part-prepayment charges work for used car loans?

If you are considering paying off your used car loan early, or you are considering at least making a part-prepayment against your principal, it will be a good idea to be aware of pre-closure and/or part-prepayment charges. Pre-closure and part-prepayment charges have been created by lenders to offset the interest lost if you pay off your loan early.

Pre-closure is paying the total oustanding loan amount before the end of the agreed upon tenure, typically lenders will charge a pre-closure fee that is a specified percentage of the remaining principal, not all lenders will use the same percentage, and the overall earlier you agree to close the loan, the higher that percentage could be. Some lenders will only allow you to pre-close only after you have paid a mandated minimum of EMIs, and some lenders don't even use this type of method.

Part-prepayment allows you to make payments against your principal as a lump sum in addition to your set monthly EMIs. This will reduce the existing loan amount, and probably save on the total interest that you may pay. This also may be allowed after a mandated minimum of at least number of EMIs, such as 6 or 12 months. Some lenders still charge an actual fee to make the part prepayment.

It's always important to read your loan agreement and terms to understand the costs associated with pre-closure and part-prepayment.