What is a charge imposed for repaying a loan early called?

What is a charge imposed for repaying a loan early called?

• A. Early Repayment Fee
• B. Prepayment Penalty
• C. Loan Closure Fee
• D. Acceleration Fee

Answer: (B)

The correct answer is "Prepayment Penalty," which refers to a fee that lenders may charge if a borrower pays off their loan before the agreed-upon schedule. This practice is often included in loan agreements to protect lenders from the loss of interest income that they would have earned if the borrower had continued to make regular payments. The penalty aims to discourage borrowers from refinancing or paying off their loans early, especially when interest rates drop, as this can lead to a decrease in profit for the lender. Understanding this term is crucial for borrowers, as it can impact the overall cost of a loan. If a borrower anticipates the possibility of paying off their loan early, they should carefully review the loan terms for any potential prepayment penalties to avoid unexpected fees.

The correct answer is "Prepayment Penalty," which refers to a fee that lenders may charge if a borrower pays off their loan before the agreed-upon schedule. This practice is often included in loan agreements to protect lenders from the loss of interest income that they would have earned if the borrower had continued to make regular payments. The penalty aims to discourage borrowers from refinancing or paying off their loans early, especially when interest rates drop, as this can lead to a decrease in profit for the lender.

Understanding this term is crucial for borrowers, as it can impact the overall cost of a loan. If a borrower anticipates the possibility of paying off their loan early, they should carefully review the loan terms for any potential prepayment penalties to avoid unexpected fees.