Most of the time, when talking about loans, we think about the penalties you could get in case of default, but also there are penalties in case you want to repay your loan early. Prepayment penalties are seen as obstacles when trying to solve your debts by paying them all at once, but there are options where you can avoid them. The penalties vary according to the loan, they might be the percentage of the remaining mortgage balance or some more interest regarding the months you still need to pay. Professionals from car title loans Amarillo explain which are the types of loans with prepayment penalties.
Prepayment penalties are convenient for lenders, it protects them from the financial loss of interest income that would otherwise have been paid over time. They are already written into contracts so they can avoid any risk, especially in a difficult situation economically speaking. There are different loans with prepayment penalties, these are:
- Mortgage: A prepayment penalty to a home loan is useful for lenders to safeguard against early refinancing. They are also added as a way to regain some kind of profit when a mortgage is given with a lower interest rate in comparison with the average. It is always better to ask the lender about prepayment penalties at the time of closing on a mortgage, these penalties cannot be imposed without a borrower’s consent or knowledge.
- Car loans: This type of loan often comes with a prepayment penalty, you can look for this in your loan agreement and disclosure.
- Some personal loans: This depends on the lenders, as most of the time. Sometimes you can come across a prepayment penalty on a home equity line of credit.
- Business loans from SBA: It is better to check for the loan agreement since this type of loan tends to have prepayment penalties.
The longer the loan term, the more lenders accumulate and the more money they will earn, because they earn money by charging interest. They can calculate the penalty amount in a variety of ways, these include the percentage of the loan balance, interest costs, and flat fees.
- Percentage of loan balance: Depending on the lender, but usually, when you try to pay early for your loan, from the remaining balance of what you already paid off, the lender might charge a certain percentage as a prepayment penalty.
- Interest costs: Another way to calculate the amount of the penalty would be doing the math about how much money you were supposed to pay in terms of interest.
- Flat fees: The simplest way for some lenders is to charge a flat fee for borrowers who want to pay off a loan early.
Take note that lenders are not allowed to put charges on a prepayment penalty when you are paying your student loan early and Federal credit unions are not allowed to do so.
There are other alternatives to avoid paying prepayment penalties, from asking your lender if it is possible to repay early a small portion of the money to, obviously, choosing loans where there are no prepayment penalties. You can always avoid any unexpected penalties by reading the Addendum to the Note, which is where the clause about penalties is usually found, before signing the dotted line check for this twice and also try to negotiate the fee away. For certain loans, you have the right to ask for options that do not include any prepayment penalties, it is just a matter of asking your lender about it. Lastly, if there are no choices of a loan without penalties, then you should ask your lender in what circumstances you have to pay the penalty if it applies to partial or only full payments, and how much is the fee. And, when talking about a mortgage, ask if the penalty applies if the home is refinanced or sold.