Prepayment Penalty

A prepayment penalty is a fee a lender charges when a borrower pays off a loan earlier than the agreed-upon term. This penalty is designed to compensate the lender for the loss of interest payments they would have earned had the loan been paid off according to the original schedule. The fee can be a percentage of the outstanding balance or a specific number of months’ interest. Borrowers, therefore, should carefully review their loan agreement to understand any prepayment penalty terms before paying off their loan early.