Prepayment Penalty

Business, Legal & Accounting Glossary

Definition: Prepayment Penalty


Prepayment Penalty


Full Definition of Prepayment Penalty


A prepayment penalty is a type of finance charge paid by a borrower for paying off a loan in advance. The prepayment penalty is common with certain mortgage loans, particularly subprime loans. Prepayment penalty terms are not standardized. A prepayment penalty may apply if too much extra principle is paid but not if the loan is paid off in full, or vice versa. Any prepayment penalty provision in a mortgage loan automatically makes that loan a non-conforming loan. The prepayment penalty is lucrative for some lenders. The borrower with poor credit will often take a high interest rate loan with a prepayment penalty if unable to qualify for any other loan. Later, when the borrower’s credit improves enough to refinance at a better rate, the prepayment penalty will kick in. For this reason, critics consider the prepayment penalty an abusive or even predatory lending practice.


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/prepayment-penalty/
Modern Language Association (MLA):
Prepayment Penalty. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
March 29, 2024 https://payrollheaven.com/define/prepayment-penalty/.
Chicago Manual of Style (CMS):
Prepayment Penalty. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/prepayment-penalty/ (accessed: March 29, 2024).
American Psychological Association (APA):
Prepayment Penalty. PayrollHeaven.com. Retrieved March 29, 2024
, from PayrollHeaven.com website: https://payrollheaven.com/define/prepayment-penalty/

Definition Sources


Definitions for Prepayment Penalty are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th February, 2020 | 0 Views.