Prepayment of Loan

Prepayment of a loan refers to paying off all or part of a loan before its scheduled due date. Prepayments can save borrowers money by reducing the amount of interest paid over the life of the loan. Some loans, however, have prepayment penalties, which are fees charged for paying off a loan early. Prepayments are common for mortgages, personal loans, and business loans, allowing borrowers to reduce their debt burden more quickly.

Example

A homeowner makes an extra payment toward their mortgage principal each month, reducing the total interest paid and shortening the loan term through prepayment.