Early Termination of a Loan

A Loan does not necessarily have a penalty imposed by a bank; however there is another penalty that you must be aware of. When taking on a loan often the depreciation of the vehicle occurs faster than you pay off your principal. For example, when you first drive your car off the lot, it can easily depreciate as much as 10% just because it is no longer considered "new".

Because of this, you are considered "upside down" in your loan. This means that the value of the car is less than what you owe on your vehicle. In many cases it may take 1 - 2 years before you become "right side up" in your loan where you own more equity in the vehicle than it is worth. This is a common misconception about loans.

As mentioned earlier, a loan is also compounded with the problem that most of the interest payments are charged up front, leaving you with very little equity in the vehicle that your monthly payments are contributing toward. So even though you have no contractual liability, you are now saddled with a vehicle that you cannot sell elsewhere or trade-in without taking a huge loss.

If you are considering a loan for the purposes of “exiting early” at any point, you must take into serious consideration these factors. While you certainly have the flexibility contractually, if you cannot actually get out of your loan without paying thousands of dollars in negative equity, there really is not a huge benefit.

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