repayment
Prepayment Penalty
A prepayment penalty is a fee charged when you pay off a loan ahead of schedule.
Last updated Reviewed by ICG Funding
Definition
What it means.
Lenders charge prepayment penalties to recover some of the interest they expected to earn over the full term. Penalties are structured as a flat percentage of the outstanding balance, a declining schedule over time, or (in commercial real estate) as a yield-maintenance formula.
Factor-rate products (BCA, revenue-based funding) typically do not have prepayment penalties but also do not offer an early-payoff discount, you owe the full factored amount regardless of when it is paid. Always read the prepayment section of a funding agreement before signing.
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