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Prepayment Penalty

Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Prepayment Penalty makes refinancing less beneficial within a set time period, usually 3 or 5 years. Loans with prepayment penalties have lower interest rates in exchange for the added restriction.

Prepayment penalty helps the lender to recoup some or all of the expense it incurs in originating the loan. If the loan is to be refinanced shortly, the lender can incur a loss, as it has not had time to make up the costs it advanced.

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