Paying out your car loan early can save you interest — but it can also trigger fees depending on the lender and the loan structure. With more lenders now offering “no early payout penalties”, many consumers assume this is always the best option.

But that isn’t always true.

Some loans with zero early-exit fees come with higher interest rates or higher ongoing fees, while some fixed-rate loans with small early payout penalties may actually work out cheaper overall.

The key is knowing how your interest is calculated, what fees apply, and what your breakeven point is before choosing a loan structure.

Here’s everything you need to know under today’s Australian lending landscape

How Interest Is Calculated on Most Car Loans

Most car loans in Australia — especially fixed-rate loans — use:

✔ Daily interest calculation

Interest is calculated on the outstanding balance each day, then charged monthly in arrears.

This means:

  • Any extra repayments reduce the balance immediately

  • You only pay interest for the time you keep the loan open

  • Paying the loan out early reduces future interest because daily interest stops the moment you settle the loan

This is very different to old-style “precomputed” loans still used overseas — Australian consumer lending regulations now require clarity on how interest is calculated (per NCCP requirements).

Do Car Loans Have Early Payout Penalties?

✔ Fixed-rate loans

Most fixed-rate car loans may charge a small early termination fee.
This is because the lender priced your loan based on a fixed period (e.g., 5 years), and ending the loan early means they lose some of the expected interest.

✔ Variable-rate loans

These usually have no early payout fees, but variable-rate car loans need to consider rate fluctuations

✔ No-early-payout lenders

Some lenders now advertise $0 early termination, which sounds perfect — but often the rate or fees are higher to offset this flexibility.

Why “No Early Payout Fees” Isn’t Always the Best Deal

In the last few years, several lenders have introduced no early payout penalty products to attract rate-sensitive borrowers.

However, this flexibility can often come at a cost:

  • Higher interest rates

  • Higher monthly account fees

  • Higher establishment or origination fees

This means a client who intends to keep the loan for the full term may end up paying thousands more just for the option to exit early — which they may never actually use.

Meanwhile…

Some lenders offering lower rates may charge:

  • A small fixed early termination fee, or

  • A pro-rata fee that reduces the longer you keep the loan

These fees are usually in the low hundreds, not thousands.

In many cases, this lower-rate loan works out cheaper overall, even after paying the early-exit fee.

The Most Important Question: How Early Do You Plan to Pay the Loan Out?

Your intention matters.

If you plan to keep the loan long term (3–5 years):

A lower-rate loan with a small early payout fee may save you more money overall.

If you expect to upgrade your car early (12–24 months):

A no-early-exit-fee lender may be the better option.

If you’re unsure:

You should compare both options side by side and calculate the:

  • Total cost if you keep the loan full term

  • Total cost if you exit after 6, 12, 24, 36 months

  • Interest saved

  • Early payout fees (if applicable)

This is where we determine your breakeven point — the exact month where one option becomes cheaper than the other.

Understanding Early Termination Fees Today

Early termination fees in modern Australian car finance are nothing like the high break costs seen in home loans during the GFC.

Car loan early-exit fees today are usually:

  • Fixed dollar amounts

  • Pro-rata

  • In the low hundreds

  • Often waived after a certain point into the loan term

  • Fully disclosed in the credit contract

These fees compensate the lender for interest they expected to earn but no longer will.

Because car loans are much smaller than mortgages, early payout fees are far more manageable.

Common Fees You Might See

Depending on the lender:

Early Termination Fee (ETF)

A small cost for ending the loan early.

Discharge Fee / Finalisation Fee

Administration cost for finalising the loan.

Rate Loading Instead of a Fee

Some lenders charge higher rates instead of ETFs, meaning you pay more each month rather than at the end.

No Fees, Higher Interest

The most flexible product, but rarely the cheapest overall.

Regulatory Requirements 

Under the National Consumer Credit Protection Act (NCCP) and ASIC responsible lending guidelines, lenders must clearly disclose:

  • All early payout fees

  • How interest is calculated

  • Whether interest stops on the day of payout (it does, for consumer loans)

  • All ongoing fees

  • Total loan cost over the contract term

These must be supplied in:

  • Credit Contract

  • Key Facts Sheet (for some lenders)

  • Terms & Conditions

So… What’s the Best Option?

There is no “best loan” for everyone.

The smartest approach is:

1️⃣ Compare both structures side-by-side

Same loan amount, same term, same deposit.

2️⃣ Calculate your breakeven point

Where the low-rate–with–fee option becomes cheaper than the high-rate–no-fee option (or vice versa).

3️⃣ Factor in your intentions

Are you likely to upgrade in 18 months?
Or keep the car for the full term?

4️⃣ Make the decision based on total cost, not just the fee

A $300 early exit fee could be cheaper than paying an extra $25 per week for 60 months.

Final Thoughts

Paying your car loan out early can save interest, but choosing the right loan before you sign is even more important.

A no-early-exit-fee loan sounds great, but:

  • The interest rate may be higher

  • Ongoing fees may be higher

  • The total cost may be significantly more

  • It’s only beneficial if you actually exit early

A lower-rate loan with a small early payout penalty may save you hundreds or thousands — even if you do exit early.

If you want help comparing early-payout options or calculating your breakeven point, Sierra Car Loans can run the numbers for you without impacting your credit score.