What is a Loan Prepayment Penalty?

A prepayment penalty is a fee the lender charges to penalize the borrower if he pays the loan off before the time set out in the terms and conditions. Every day consumers sign on the dotted line of mortgages and loans not fully understanding the terms and conditions of the financing. It isn't until they try to refinance or pay off the loan that they are made aware of the true conditions. It is very important to know what you are signing before you decide to close a loan, otherwise you can lose a lot of money.

Prepayment penalties are usually anywhere from 2 to 5 years. The borrower will be required to pay the percentage of the Loan set forth in the terms of the penalty agreement. Lenders charge a prepayment penalty as a way to secure recovery of a loss they have taken in order to give the borrower a lower interest rate. The penalty is made as a means to discourage refinancing in case the interest rates are better at a later time.

Lenders rarely waive prepayment penalties so it is very important for all borrowers to understand the conditions of their financing.  A lack of knowledge can cost the consumer thousands of dollars in unexpected fees. If you don't fully understand a condition ask question before signing, it's your right.

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