What Are Early Repayment Fees?
Early repayment fees, sometimes called early termination fees, exit fees, or payout penalties, are charges that lenders impose when you pay off your loan before the agreed term ends. These fees compensate lenders for the interest income they lose when you repay early.
When you take out a car loan, the lender calculates their expected return based on receiving interest payments over the full loan term. If you repay after two years of a five-year loan, the lender misses out on three years of interest income. Early repayment fees recover some of this lost revenue.
Not all car loans include these fees. Many Australian lenders now offer loans with no early repayment penalties, recognising that flexible products attract more customers. However, fees remain common, particularly on fixed-rate loans and finance arranged through dealerships.
Types of Early Repayment Charges
Early repayment charges come in several forms, and understanding the specific type applicable to your loan helps calculate potential costs.
Fixed Dollar Fees: Some loans charge a flat fee for early repayment, regardless of when you pay out. This might be $200 to $500 or a specified amount in your contract. The advantage of fixed fees is predictability, and they become proportionally less significant the larger your loan.
Percentage of Balance: Other lenders charge a percentage of the remaining balance at payout. This might be 1 to 2 percent of what you still owe. On a $20,000 remaining balance, a 1.5 percent fee equals $300.
Interest Adjustment: Fixed-rate loans often include interest adjustment calculations that consider how much interest you would have paid over the remaining term. If market rates have dropped since you took out your loan, the lender loses more by your early repayment, and break costs can be substantial.
Administrative Fees: Separate from penalties, some lenders charge administrative fees for processing early payout requests, producing statements, and removing PPSR registrations. These are typically smaller, ranging from $50 to $150.
Fixed Rate Loans and Break Costs
Fixed-rate car loans often carry the highest potential early repayment costs, particularly when interest rates have fallen since you took out the loan. Understanding this mechanism helps avoid costly surprises.
When you fix your interest rate, the lender also fixes their funding costs. They borrow money at a certain rate to lend to you at a slightly higher rate, with the difference being their margin. If you repay early and market rates have dropped, the lender cannot relend your money at the same rate they could when you originally borrowed.
Break costs are calculated based on the interest rate differential, the remaining loan balance, and the time left on your loan. If rates have fallen significantly and you have substantial time remaining, break costs can amount to thousands of dollars.
Conversely, if interest rates have risen since you took your fixed loan, break costs may be minimal or zero. The lender can relend at higher rates than your original loan, so they experience no loss from your early repayment.
How to Find Your Loan's Early Repayment Terms
Before making extra payments or planning early payout, understand exactly what fees apply to your specific loan.
Check Your Contract: Your loan contract or credit guide should detail any early repayment fees. Look for sections titled "Early Repayment," "Payout," "Termination," or "Fees and Charges."
Request a Payout Figure: Contact your lender and request an official payout figure. This quote includes your remaining balance, any applicable fees, and interest calculated to a specific date. Most payout quotes are valid for a limited period, typically 7 to 14 days.
Ask About Fee Waivers: Some lenders have discretion to waive or reduce early repayment fees in certain circumstances. If you are refinancing with the same institution or have been a long-standing customer with perfect payment history, asking about fee reduction is worthwhile.
When Paying Early Still Makes Sense
Even with early repayment fees, paying off your loan ahead of schedule can still save money. The key is calculating whether interest savings exceed the fees charged.
Consider this example: You have $15,000 remaining on your car loan at 8 percent interest with two years left. Total interest over those two years would be approximately $1,260. Your lender charges a $300 early repayment fee. Paying out now saves you $960 even after the fee.
The calculation becomes closer when fees are higher or remaining interest is lower. If your early repayment fee is $1,000 and you would only save $1,100 in interest, the benefit shrinks considerably, and other factors like the value of having funds available for other purposes enter the equation.
Use our car finance calculator to estimate the remaining interest on your loan. Then compare this to your payout quote including fees to determine whether early repayment makes financial sense.
Strategies to Minimise Early Repayment Costs
Several strategies can help reduce or avoid early repayment costs on your car loan.
Choose Loans Without Penalties: When initially selecting a car loan, prioritise products without early repayment fees if you anticipate paying off early. Many Australian lenders now offer fee-free early repayment as a competitive feature.
Make Extra Repayments Instead: If full early payout incurs significant fees, consider making extra repayments that your loan permits without penalty. Many loans allow additional payments up to a certain amount annually without charges. These extra payments reduce your balance, shorten your term, and save interest without triggering payout fees.
Wait for Fee-Free Periods: Some loan contracts specify that early repayment fees reduce or disappear after a certain period. Fees might apply in the first two years but not thereafter. If you are considering early payout, check whether waiting a few months would eliminate fees entirely.
Negotiate Reduction: Particularly if you are refinancing to another loan with the same lender or moving to a different product they offer, ask for fee waivers or reductions. Lenders would rather keep your business with reduced fees than lose you entirely.
Early Repayment When Selling or Trading
If you are selling your car or trading it in for another vehicle, you will need to pay out your existing loan. Early repayment fees apply regardless of why you are paying out early.
When selling privately, you need to clear the loan to remove the lender's PPSR registration and provide clear title to the buyer. Factor any early repayment fees into your expected proceeds from the sale to understand your true financial position.
When trading in, some dealers can facilitate direct payout to your existing lender from the trade-in value. However, you still pay any applicable early repayment fees. If your trade-in value is less than your payout amount plus fees, you need to cover the shortfall.
Consider timing if possible. If early repayment fees decrease after a certain period and your need is not urgent, waiting may reduce costs. However, do not hold a depreciating asset longer than necessary just to save moderate fees.
Questions to Ask Before Signing
When taking out a new car loan, ask specific questions about early repayment to avoid surprises later.
Is there any penalty for paying out this loan early? If yes, how is it calculated and what is the maximum amount it could be? Can I make extra repayments without penalty? Is there a limit on extra repayments allowed per year? Do early repayment terms change after a certain period of the loan? Are there any administrative fees for processing an early payout?
Get clear answers to these questions before committing to a loan. A slightly higher interest rate on a loan with no early repayment fees may prove cheaper than a lower rate with significant exit costs, depending on your circumstances and intentions.
Ready to calculate how early repayment affects your loan? Use our car finance calculator to model different scenarios and understand the interest implications of your repayment strategy.
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Car Finance Calculator Team
Our team of finance experts is dedicated to helping Australians make informed decisions about car loans. We provide accurate, up-to-date information to guide you through your vehicle financing journey.