Glossary
Prepayment penalty
A fee some lenders charge for paying a loan off early. Rare on consumer loans, common in commercial lending — always check the note.
A prepayment penalty compensates the lender for interest it loses when you pay off a loan ahead of schedule. Federal rules have made them rare on consumer mortgages and personal loans, but they still appear in auto, commercial, and some subprime lending. Before you plan to pay a loan off early — or refinance it — read the note to confirm there is no penalty eating into your savings.
Related terms
- Deed of trust A three-party document (borrower, lender, trustee) some states use instead of a mortgage to secure a home loan against the property.
- PMI Private mortgage insurance — a monthly premium that protects the lender, not you, when your down payment is under 20%.
- Unsecured A loan that requires no collateral — approval rests on your credit profile and income.
- HELOC A revolving credit line secured by your home, usually at a variable rate — draw and repay as needed, like a credit card backed by the house.
- Amortization The schedule that splits each payment between interest and principal. Early payments are mostly interest; the balance flips near the end of the term.
- Equity The slice of your home you actually own — its market value minus what you still owe on it.