# Prepayment Penalty

> A prepayment penalty is a fee some lenders charge when you pay off a loan early. It compensates the lender for the interest income they lose when a loan is repaid ahead of schedule.

## Key takeaways
- A prepayment penalty is a fee some lenders charge when you pay off a loan early, compensating them for the interest income they lose.
- It can take several forms — a percentage of the remaining balance, a set number of months' interest, or a declining "step-down" penalty — so check your loan agreement.
- Not every loan has one, and some even offer early-payoff discounts, so weigh any penalty against the interest you'd save by paying early.

## What a prepayment penalty is

A **prepayment penalty** is a fee a lender charges if you pay off your loan — in
full or sometimes in part — before the end of its scheduled term. Lenders make
money from the **interest** you pay over time, so when you repay early they
collect less than they expected. The penalty is how they recover some of that lost
income.

Not every loan has one, but it's important to check, because a penalty can erase
the savings you hoped to gain by paying off debt early.

### How it's usually calculated

Prepayment penalties take a few common forms:

- A **percentage of the remaining balance** (for example, 2% of what's left).
- A set number of **months' worth of interest**.
- A **declining (or "step-down") penalty** that shrinks the longer you hold the
  loan — such as 5% in year one, 4% in year two, and so on.

Some longer-term loans, including certain **SBA loans**, may include a penalty
during the early years of the term.

### A simple example

Suppose you have **$60,000** left on a loan with a **3%** prepayment penalty. Pay
it off early and you'd owe an extra **$1,800** on top of the balance. If
refinancing or early payoff would otherwise save you more than that, it may still
be worth it — but you need to run the numbers.

### What to watch for

- Look for the words **"prepayment," "early payoff,"** or **"prepayment premium"**
  in your loan agreement.
- Ask whether the penalty applies to **partial** payments or only full payoff.
- Compare it against any **interest you'd save** by paying early.

Hoss Capital can help you compare offers and flag prepayment terms up front so an
early-payoff plan doesn't come with a surprise fee.

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