A prepayment penalty is a fee that the lender might impose on the borrower for paying off the loan ahead of time. For instance, if a person has a 30-year mortgage, he might have to pay this particular penalty if he decides to pay off the loan in full after ten years. Not every mortgage has a prepayment penalty though many modern loans do include these provisions. For a borrower, it is better to have a loan that does not include this provision. Some might wonder why the lender would impose a prepayment penalty. In many cases, the prepayment penalty is a protection to make sure that the lender makes money even if the borrower decides to make his payment right away. This is because the lender makes money based upon interest accumulation. When payments are made early, the lender misses out on this income though they do benefit from being paid in full.
