Prepayment penalties are fees charged by lenders when a borrower pays off a loan before the scheduled maturity date. These penalties are designed to compensate the lender for the lost interest income that would have been earned had the loan been paid off according to the original terms.
Avoiding prepayment penalties can save borrowers a significant amount of money. For example, a borrower who pays off a $100,000 loan with a 5% interest rate and a 2% prepayment penalty would save $2,000 by avoiding the penalty. In some cases, prepayment penalties can even exceed the amount of interest that has been saved by paying off the loan early.
