What is a Prepayment Penalty?
A prepayment penalty is a lending provision that, if triggered, requires the payment of extra interest or a fee due to paying your loan off early. Most prepayment penalties run for an initial period of years—typically expiring after one, three or five years.
If triggered, the penalty is usually a percent of the loan or a certain number of months of interest. Prepayment penalties can be “hard”, triggered no matter what brings about the prepayment, or “soft”, waived if you prepay due to selling. Even loans with a prepayment penalty usually allow you prepay up to 20% of the loan balance (over and above your minimum payments) before a penalty kicks in.
Prepayment penalties are pretty rare, but if we talk about one of the few loans that have one, we will describe it to you in detail.
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