In ON, what should I know about prepayment penalty for car loans?

In Ontario, your ability to prepay a car loan without penalty hinges critically on whether your financing agreement is 'open' or 'closed'. Many open loans, often structured with variable rates or as lines of credit, explicitly permit lump-sum prepayments or full payouts at any time without incurring additional fees, offering significant flexibility and potential interest savings. However, the majority of traditional car loans are 'closed' agreements, featuring a fixed term and interest rate, and these commonly include a prepayment penalty clause. These penalties are stipulated in your contract to compensate the lender for the anticipated interest income lost when you pay off the loan ahead of schedule. While Ontario's *Consumer Protection Act, 2002* provides broad consumer protections, it does not impose specific caps on car loan prepayment penalties in the same way it might for other credit products, making contract review paramount. The penalty, if applicable, is typically calculated as a fixed fee, a specified number of months' interest, or a percentage of the outstanding principal. As market conditions evolve towards 2025, with potential shifts in interest rates, understanding these terms is vital for consumers seeking to refinance, sell their vehicle, or simply reduce their overall debt burden. Always consult your specific loan agreement or contact your lender directly to confirm any potential fees before making a prepayment to ensure you optimize your financial strategy.