Define: Prepayment Penalty

UK Accounting Glossary

Definition: Prepayment Penalty



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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.


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Prepayment Penalty. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. March 31, 2020 https://payrollheaven.com/define/prepayment-penalty/.
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Prepayment Penalty. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/prepayment-penalty/ (accessed: March 31, 2020).
American Psychological Association (APA):
Prepayment Penalty. PayrollHeaven.com. Retrieved March 31, 2020, 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.