---
title: "Prepayment penalty: definition | Desert Rock Capital"
url: "https://www.desertrockcapital.com/glossary/prepayment-penalty"
description: "A prepayment penalty is a fee some lenders charge when you pay off a loan early."
---

Loan costs

# Prepayment penalty
All lending terms
Definition

A prepayment penalty is a fee some lenders charge when you pay off a loan early. It is intended to recover a portion of the interest the lender would have collected over the full term.

A prepayment penalty applies when you repay all or part of a loan ahead of the scheduled term, and it offsets interest income the lender would otherwise have earned. It may be calculated as a percentage of the remaining balance, a set number of months of interest, or a flat amount, and some penalties apply only within an early window of the loan. When a loan has no prepayment penalty, repaying early generally reduces the remaining interest and the total cost. Whether a loan includes a prepayment penalty, and how it is calculated, is stated in the loan agreement, so it is a clause customers commonly check before signing.

Source: [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/ask-cfpb/what-is-a-prepayment-penalty-en-1957/). This definition is general educational information, not legal or financial advice.
Related

- [Personal loans](/services/personal-loans)
- [Signature loans](/services/signature-loans)
- [Loan FAQs](/faqs)
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