Etini
Valued Contributor
To some borrowers, it is a big relief if lenders can pay their loans early. For them, they are happy that their funds haven't been tied down and they can deploy these financial assets to make more money. That's one side of the divide. Do you know that to some lenders, it is a breach of contract if you payback your loans ahead of schedule? They wouid make you to pay a penalty called prepayment penalty. In this post, we are going to discuss prepayment penalties.
A prepayment penalty is a fee that a borrower mandates a lender to pay as compensation for paying off a loan before the scheduled period of repayment. This simply means that if I take up a loan for 6 months and I decide to pay it off by the third month, if there was a prepayment penalty, I would be forced to pay it as a penalty for paying my loan early.
So why wouid a borrower impose a penalty for quick payment of loans? Financial institutions are in the business of making money off the loans they give out. The interest that a lender pays is the profit that the financial institutions gain from these loans and the longer your repayment period, the higher the interests which ultimately means that their profit from that amount of money is higher. And when you pay your loan before schedule, you have cut short the expected profits on that loan amount.
Prepayment penalties are common in mortgage loans but they can be included in any kind of loan. That's why you need to read and understand all the terms and condition of a loan before taking it. If a loan has a prepayment penalty and you are not comfortable with it, you can decide to turn down the loan offer.
A prepayment penalty is a fee that a borrower mandates a lender to pay as compensation for paying off a loan before the scheduled period of repayment. This simply means that if I take up a loan for 6 months and I decide to pay it off by the third month, if there was a prepayment penalty, I would be forced to pay it as a penalty for paying my loan early.
So why wouid a borrower impose a penalty for quick payment of loans? Financial institutions are in the business of making money off the loans they give out. The interest that a lender pays is the profit that the financial institutions gain from these loans and the longer your repayment period, the higher the interests which ultimately means that their profit from that amount of money is higher. And when you pay your loan before schedule, you have cut short the expected profits on that loan amount.
Prepayment penalties are common in mortgage loans but they can be included in any kind of loan. That's why you need to read and understand all the terms and condition of a loan before taking it. If a loan has a prepayment penalty and you are not comfortable with it, you can decide to turn down the loan offer.
