What is a prepayment penalty on a personal loan?
What is a prepayment penalty on a personal loan?

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Personal loans have become one of the fastest growing categories of debt in the United States thanks to their ease of use, fast funding, and flexibility in how the money can be used. For example, personal loans can be used to pay for a wedding, vacation, funeral, medical bill, home repairs, renovations and more. Many people also use personal loans as a way to consolidate debt, and you can usually borrow up to $100,000, depending on your creditworthiness and the maximum amount allowed by the lender.

But there are still a lot of things you need to know about personal loans before deciding to get one. Like any other form of debt, personal loans are repaid monthly with interest. But these may not be the only fees you are charged. Some personal lenders also charge origination fees and late payment fees, but another, weirder fee you should be aware of is a prepayment penalty.

Below, Select details what you need to know about prepayment penalties on a personal loan, including how much they cost and how to find out if the loan you’re applying for has these charges.

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What is a prepayment penalty?

A prepayment penalty (also known as a prepayment charge) is an additional fee charged by some lenders if you prepay your loan. All personal loans come with a specified loan term – that is, the time you have to fully pay off the loan balance (plus interest) you borrowed.

Loan repayment terms can usually vary from six months to seven years, but each lender has their own repayment requirements which can differ by a few months or a few years. For example, Marcus by Goldman Sachs Personal Loans allows borrowers to repay their loan in as little as three years and as long as six years (36 to 72 months). SoFi Personal Loanshowever, gives borrowers two to seven years to repay their loan amount (24 to 84 months).

So let’s say you’re approved for a personal loan with a prepayment penalty and the lender says you have a repayment term of four years (48 months); you will need to make fixed, equal monthly payments with interest for 48 months to repay the amount borrowed. However, if you pay more than the amount due each month, you will end up repaying the loan before the end of the 48 months and you will have to pay a prepayment penalty.

How much is the prepayment penalty?

The actual cost of a prepayment penalty will vary depending on how it is charged. It can be charged in one of three ways:

  • As a percentage of your loan balance
  • Like the amount of interest your lender misses since you prepaid the loan
  • As a package

For this reason, the prepayment penalty can cost you anywhere from a few hundred to a few thousand dollars, depending on how much you borrowed and how the fees are charged. So, while prepaying your loan may help you save on interest charged, you may in turn trigger prepayment charges.

Be sure to do the math before prepaying your loan. If you’re almost done paying off a personal loan balance and want to prepay the rest of what you owe, be sure to compare the cost of the fixed prepayment charge against the interest remaining on the loan. . It may be cheaper to continue making monthly payments rather than paying a flat fee.

How do you know if your personal loan has a prepayment penalty?

Not all personal lenders charge a prepayment penalty. In fact, some – like LightStream and Discover — do not charge any additional fees.

Be sure to read the loan agreement so you know all the fees and how they will be charged. But if you’re still unsure whether you’ll be charged a prepayment fee, you can always ask the lender directly.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    2.49% to 19.99%* when you sign up for autopay

  • Purpose of the loan

    Debt consolidation, renovation, car financing, medical expenses, marriage and more

  • Loan amounts

  • terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

Discover personal loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, home improvement, wedding or vacation

  • Loan amounts

  • terms

  • Credit needed

  • Assembly costs

  • Prepayment penalty

  • Late charge

At the end of the line

There’s a lot to learn about personal loans, including terms and fees. The prepayment penalty is a charge you should be aware of if you are considering using a personal loan to finance large expenses.

Most importantly, though, you should always make sure you’re comfortable with all loan terms and fees before signing on the dotted line – and never borrow more than you can afford. refund.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

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