What is Prepayment Penalty?

Some of the loans can charge you a fee if you repay the loan earlier than the due date. This fee is referred to as prepayment penalty (also commonly referred to as early payment penalty).

Most of the loans will require you to hold them for a particular time period, which usually lasts for several years. The reason for this is that during this time you will be required to pay interest on the balance, which represents a profit to the lender. The prepayment penalty is charged when you pay down the loan earlier or refinance it. However, the prepayment penalty may be worth incurring in case you have a better alternative that comes at a lower interest rate.

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