Prepayment Penalty

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.