Getting a loan isn’t always ideal, but when you need one, it’s helpful. What isn’t helpful is the added cost on an already expensive deal, including fees.
Lenders can add fees how they see fit, whether they’re late fees or origination fees. But there are other fees, such as prepayment penalties, you might not know about.
If you’re taking out a loan and aren’t sure what fees to check out, here’s what a prepayment penalty is and where you’re most likely to find one.
What is a prepayment penalty?
A prepayment penalty is a fee lenders tack on to penalize you for paying off your loan early. The lender determines the fee, which is usually a percentage of the remaining balance or months’ worth of interest.
Completing your loan before the final date is good for you since you’ll be able to pocket the extra cash that would otherwise go toward interest. But that’s why it’s bad for lenders. They’re missing out on collecting interest, so they impose a prepayment penalty.
Prepayment penalties vary by loan type, lender, and state. Depending on the loan you’re getting, you might face a prepayment penalty.
Loans that allow prepayment penalties
Some loans restrict prepayment penalties, but others allow them. Here are a few that could enforce prepayment penalties.
When you’re shopping for a personal loan, look out for prepayment penalties. As you’re browsing different lenders, see if they tout “no fees” upfront, and make sure you know which ones they’re waiving.
If you’ve already gotten a personal loan, review your loan terms. If the loan doesn’t have a prepayment penalty, you can pay off your personal loan early without the added fee.
Not all mortgages have prepayment penalties. Conventional loans allow them, while Federal Housing Administration (FHA) loans don’t. While it’s not required for conventional loans to include prepayment penalties, you’ll want to review your terms.
If you’re paying just a little more on your mortgage payments every month to lower your principal faster, you should be OK.
But if you’re planning on paying off your mortgage much sooner, such as three to five years earlier, you might get hit with a prepayment penalty.
Auto loan prepayment penalties aren’t cut and dried. The penalty varies by lender, loan type, and your state’s law, according to the Consumer Financial Protection Bureau (CFPB).
According to online car-buying company CarsDirect, 36 states and the District of Columbia allow prepayment penalties.
More Americans are taking out car loans for six years or longer, according to the CFPB. That’s a lot of interest to a lender, so a prepayment penalty exists for it to collect more.
Before getting an auto loan, ask if a prepayment penalty is enforced and, if so, how to get it removed. Consider changing lenders if you can’t get a low-interest loan without a prepayment penalty.
Loans that don’t allow prepayment penalties
While paying off certain loans early could end up costing you more in prepayment penalties, other loans don’t have the same rules. You can pay off these loans early without repercussions.
Both private and federal student loans don’t have prepayment penalties. This is great news if you have the means to pay off your loan before the final due date.
If you’re hoping to make bigger monthly student loan payments or extra payments every month, contact your lender about how to make sure your money goes to the principal and not interest.
Try to pay off the loans with the highest interest rates first. Typically, private student loans have higher interest rates than federal loans.
While conventional mortgages can enforce prepayment penalties, FHA loans don’t. It’s illegal for lenders to charge prepayment penalties on FHA loans.
Beware of prepayment penalties
When you’re applying for a loan, look to see if prepayment penalties are enforced. Try to find lenders that don’t assess these fees. If you’re coming up short, see if you can negotiate for a loan without the penalty.
If you already have a loan that enforces a prepayment penalty, ask your lender about your options if you want to pay it off early.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|