Personal loan

What is a prepayment penalty on a personal loan?

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Personal loans have become one of the fastest growing debt categories in the United States due to their ease of use, quick 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 to consolidate their debt, and you can usually borrow up to $ 100,000, depending on your creditworthiness and the maximum amount allowed by the lender.

But there is still a lot you need to know about personal loans before you decide to take one out. Like any other form of debt, personal loans are repaid monthly with interest. But these might not be the only fees you are charged. Some personal lenders also charge a set-up fee and late payment fee, but another, stranger 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 their cost and how to know if the loan you’re applying for has these fees.

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When looking for a personal loan, it can be helpful to compare several different offers to find the best interest rate and payment terms for your needs. With this comparison tool, you only need to answer a few questions and Even Financial can determine the best deals for you. The service is free, secure and does not affect your credit rating.

Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that connects you with third party lenders. Any information you provide is transmitted directly to Even Financial. Select does not have access to any of the data you provide. Select can receive an affiliate commission on partner offers in the Even Financial tool. The commission does not influence the selection in the order of the offers.

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, which is the amount of time you have to pay off the loan balance (plus interest) you have borrowed in full.

Loan repayment terms can generally range 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 pay off their loan in as little as three years and up to six years (36 to 72 months). SoFi personal loans, however, give borrowers two to seven years to pay off 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 four-year (48-month) repayment term; you will need to make fixed, equal monthly payments with interest for 48 months to repay the amount you borrowed. However, if you pay more than the amount owed each month, you will end up paying off the loan before the end of the 48 months and you will be charged a prepayment penalty.

How much is the prepayment penalty?

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

  • As a percentage of your loan balance
  • Since the amount of interest your lender has missed since you prepaid the loan
  • In the form of 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.

Make sure you do the math before you prepay 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 remaining interest on the loan. . It may be cheaper to keep making monthly payments than it is to pay the 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 – charge no additional fees.

Make sure you read the loan agreement to be aware of all the fees and how they will be billed. But if you are still unsure whether you will be charged a prepayment charge, you can always ask the lender directly.

LightStream personal loans

  • Annual percentage rate (APR)

    2.49% to 19.99% * when you sign up for automatic payment

  • Purpose of the loan

    Debt Consolidation, Home Renovation, Auto Financing, Medical Expenses, Marriage and Others

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

  • Prepayment penalty

  • Late charge

Discover personal loans

  • Annual percentage rate (APR)

  • Purpose of the loan

    Debt Consolidation, Home Renovation, Wedding or Vacation

  • Loan amounts

  • terms

  • Credit needed

  • Original fees

  • Prepayment penalty

  • Late charge

At the end of the line

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

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

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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.



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