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Prepayment Premium

A prepayment premium is money a lender charges a borrower for repaying a debt early. Not all states allow the premiums.

Money a lender charges for an early repayment of debt. It is also called a prepayment penalty.

Prepayment premiums are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia. The remaining fourteen states do not allow any form of prepayment premiums. Even among those states that do, individual lenders may not assess them.

Depending on the lender, a prepayment premium may be imposed if you pay your principle on an accelerated schedule, pay it all off at once, and/or if you refinance the original loan.

The advantage of repaying your debt early is that you can save a great deal of money in finance charges. You will want to look at how large the prepayment premium is and weigh that against how much money you would save by paying the loan off early or refinancing.

The amount of a prepayment premium, or penalty, varies. Most often, it is a small percentage of the amount you borrowed. The prepayment premium also can be the equivalent of several months’ mortgage payments.

Be sure to read your contract carefully and ask plenty of questions to understand whether you would be charged a prepayment premium for paying off your loan early.