{"id":29215,"date":"2024-11-08T04:47:48","date_gmt":"2024-11-08T12:47:48","guid":{"rendered":"https:\/\/getjerry.com\/wp-site\/?p=29215"},"modified":"2024-11-09T13:55:46","modified_gmt":"2024-11-09T21:55:46","slug":"what-is-car-loan-curtailment","status":"publish","type":"post","link":"https:\/\/jerry.ai\/car-loan\/what-is-car-loan-curtailment\/","title":{"rendered":"What is curtailment on a car loan?"},"content":{"rendered":"\n

Question:<\/strong> I was looking through my car loan agreement when I encountered an unfamiliar term: curtailment. What does \u201ccurtailment\u201d mean and how does it affect my auto loan?<\/p>\n\n\n\n

Answer:<\/strong> A car loan curtailment means paying off part or all of your auto loan early. If you pay your loan on schedule, you don\u2019t need to think about this. But if you do plan to pay your loan off before the term is over, check your loan agreement. It should spell out the rules about loan curtailments\u2014for example, if a loan has a prepayment penalty. This would require you to pay a fee for paying off your loan early.<\/p>\n\n\n\n

How a principal curtailment works<\/h2>\n\n\n\n

Paying a loan off ahead of schedule\u2014also called principal curtailment\u2014will help you save on interest. Consider the following scenario: Let\u2019s say you\u2019re buying a car worth $50,000. You put down 20 percent, or $10,000 of the car value, and you borrow $40,000.<\/p>\n\n\n\n

At 7 percent interest over a loan term of 60 months, you\u2019ll pay about $7,523 in interest over the life of your loan. That means the total cost of owning your car would be around $57,523 versus $50,000 if you\u2019d paid in cash. Your monthly payment toward your principal and interest will be about $792.<\/p>\n\n\n\n

Take a look at the table below, where:<\/p>\n\n\n\n

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  • Years: The number of years that have passed since you took out your loan.<\/li>\n\n\n\n
  • Interest: The amount of interest paid in the previous 12-month period (e.g. you paid $2,580.66 in interest in the first year).<\/li>\n\n\n\n
  • Principal: <\/strong>The amount of principal paid in the previous 12-month period (e.g. you paid $6,923.92 toward your principal in the first year).<\/li>\n\n\n\n
  • Ending balance: The amount you have left to pay at the end of the year.<\/li>\n<\/ul>\n\n\n\n
    Years<\/th>Interest<\/th>Principal<\/th>Ending Balance<\/th><\/tr><\/thead>
    1<\/td>$2,580.66<\/td>$6,923.92<\/td>$33,076.08<\/td><\/tr>
    2<\/td>$2,080.13<\/td>$7,424.45<\/td>$25,651.63<\/td><\/tr>
    3<\/td>$1,543.41<\/td>$7,961.16<\/td>$17,690.47<\/td><\/tr>
    4<\/td>$967.90<\/td>$8,536.68<\/td>$9,153.79<\/td><\/tr>
    5<\/td>$350.78<\/td>$9,153.79<\/td>$0.00<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

    When you put extra money toward your loan\u2019s principal\u2014or the original amount you borrowed\u2014you reduce the number of payments you\u2019ll make and the amount of time you\u2019ll be charged interest. That saves you money.<\/p>\n\n\n\n

    Let\u2019s say you receive a windfall two years into your car loan and decide to pay off the remaining $25,651. (Let\u2019s also assume you don\u2019t have to pay any curtailment penalties.) In the previous two years, you paid about $4,660.79 in interest and put about $14,348 toward your principal. Then, you sent $25,651 to the bank. The total cost of your vehicle, including your down payment, is about $54,660.<\/p>\n\n\n\n

    Now compare that to a scenario where you pay off your loan on schedule. You would have paid about $7,523 in interest. By paying off your loan at the end of the second year, you skipped three years of interest payments, saving $2,862.09.<\/p>\n\n\n\n

    The savings goes even further if your dealer gives you a lower price when financing versus paying in cash. If you get such a deal, make sure you aren\u2019t subject to any prepayment penalties. If you\u2019re not, then you might be able to both get a lower price for the car and avoid interest payments.<\/p>\n\n\n\n

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