What Exactly Are Prepayment Penalties?
Prepayment penalty is a cost that has to bear by the borrower for repaying the loan early. It is also called as redemption charges or settlement fees. It is taken by the lender to settle the loan deal before its completion to cover the amount of profit that they will get if you pay the loan till the due date. These penalties are usually defined in the loan agreement but if it is not, then also lender get charge that for early payment. In most of the cases, prepayment penalty includes the remaining borrowed amount and possible interest charges for few months.
How To Calculate These Penalties?
There is no particular way to calculate the penalty for early payment. These are generally written in the loan agreement so one must consider it to know the penalty cost. But is it is not mentioned than it will depend on various factors such as how much amount to still owe, rate of interest of the loan, tenure repaying for the loan and so on. Do keep in mind that you have to pay these penalties whether you partially or fully pay off your loan amount. Through this penalty lenders try to cover their loss that incurred due to your early repayment step. Specific early payment penalty vary from lender to lender.
What Are The Types Of Early Settlement Penalty?
There are mainly two types of prepayment penalties which are defined below:
Hard Prepayment Penalties – These are traditional form of penalty that is basically attached with the secured loans. In this, lender charge the amount if borrower sell their property to settle the loan or refinance it in a limited time frame. In most of the cases, penalty is of 6 months interest but it varies from lender to lender.
Soft Prepayment Penalties – Like its name, these penalties are soft and not as bad as hard one. These penalties are penalized if you refinance your loan with same or other lender to get loan at low interest charges. If you got cash from some other source, then it is possible that lender so not takes any penalty. It is considered to be the best option to avoid the environment of high interest rate.
Is There Any Way To Avoid This Penalty?
To avoid the penalty you need to check the terms of your deal as most of the long term loan contacts allow borrower to prepay the certain amount every year. Do keep in mind that there are certain types of prepayment that do not include penalty like prepayment through selling asset after certain period of time frame.
Finishing Point
Prepayment is surely a good option to get a debt free life and have a financial freedom. But you need to make sure that your decision won’t make your loan expensive. Before taking this decision, it is always advisable to have a word with your lender to understand their penalties and convince them to lower it to make affordable for you.
