Please install Yoast SEO plugin and enable the breadcrumb option to use this shortcode!

Thinking of paying off a loan early or refinancing it? Before you do, make sure you check your loan agreement for any prepayment premiums. Also known as prepayment penalties, these are fees that lenders charge if you elect to pay your loan off early. Here’s what you need to know about why lenders do this and how prepayment premiums work.
Prepaying Leads to Less Money Made for the Lender
When you get a loan and start making your payments on it, there are two specific things you’re paying, which are:
The loan principal – This is the amount that you borrowed from the lender.
The interest – This is what the lender is charging you for borrowing the money.
Here’s an example – let’s say that you borrow a $5,000 personal loan with an annual percentage rate (APR) of 10 percent. The loan has a two-year term, and you pay $250 per month. Over the course of that two years, you pay the lender $6,000, and they make a $1,000 profit from the interest.
That’s a very basic example, and most loans have other small fees besides interest that get lumped into the APR (such as an origination fee). But it works for explaining prepayment.
If you reach the end of the first year on your personal loan’s term and have some extra money, you could pay the remaining balance off then. Since you only had the loan for one year and not two, the lender is now only making $500 in interest. Their profits have been cut in half.
Lenders charge prepayment premiums to mitigate what they lose if a borrower pays their loan off early. These premiums are more common with larger loan that have longer terms, such as mortgages and business loans, because prepayment on one of those can result in big losses on the interest a lender was expecting to make. They could lose out on years of profits from a borrower choosing to prepay.
How Prepayment Premiums Work
Prepayment premiums are fairly simple. If you pay your loan off early, then you must also pay any prepayment premiums at that time. The exact details will depend on your loan agreement, and you should always find out if a loan will have any prepayment penalties before you agree to it.
With mortgages, there are two types of prepayment premiums, which are soft premiums and hard premiums.
If a mortgage has a soft prepayment premium, then the borrower will only need to pay the premium if they prepay their mortgage by refinancing. The lender can’t charge the premium if the borrower sellers their home and pays off the mortgage that way.
Hard prepayment premiums are stricter. Regardless of whether the borrower refinances their mortgage or sells their home, the lender can charge them the prepayment premium, meaning the borrower has no way to pay early without getting stuck with that penalty.
A common prepayment premium amount for a mortgage is 80 percent of the interest the borrower would have paid over six months. With a large mortgage, this can end up being a considerable amount.
Watch for Prepayment Premiums
Whenever you’re applying for a loan, you should read the contract thoroughly and check for any prepayment premiums. Make sure that you fully understand the terms and how much money the lender will charge you if you decide to prepay, whether that’s through refinancing, selling the asset tied to the loan or simply because you’re financially able to do so.

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
$125,000 Small Business Loan
"Thanks for funding me in literally 24 hours"
$35,000 Lawsuit Advance
"Great choice for first time fix and flippers"
$250,000 Hard money Loan

In The Media

Delancey Street CEO discusses ways to reward employees
Delancey Street CEO discusses the benefits of franchising on Forbes.
Delancey Street CEO discusses management on AMEX.
Tennessee SEO Company

SEO Services For Tennessee Businesses If you’re the head of…

Is There a Car Insurance Discount for Having Winter Tires?

Yes! Many car insurance companies offer discounts for having winter…

Funding Circle

What Is Funding Circle? In Funding Circle, business owners who…


In today’s society, it appears that many people are looking…

A Step by Step Guide to Incorporating a Business

Your business can never flourish without being incorporated, as there…

Delancey Street understands funding like no one else!
Steven Norris
Get Funding Today

Ready To Get Started?

If you have questions, feel free to shoot us an email, or fill out our live chat.

Apply Now