What is a prepayment fee?

A prepayment fee is a charge imposed by a lender when a borrower pays off a loan early, either partially or in full. This fee compensates the lender for the interest income lost due to the early repayment. Prepayment fees are commonly found in mortgages and certain types of personal loans, and their terms are typically outlined in the loan agreement. Borrowers should review these terms carefully to understand any potential costs associated with early repayment.