A pre payment penalty is an amount charged
by the lending company for paying off a loan before the scheduled
date of payment. Typically, that amount is less than the interest
the lender would have collected on the loan, had the payments
run their natural course.
Remember that the principal
is the amount of the original loan while the interest is amount
charged by the lender for allowing you to borrow that money.
Some companies don’t charge anything for early payoff.
Those companies simply put that money back into their lending
pool and make another loan, collecting the interest from that
loan. But some companies charge a penalty for that early payoff
because they’ve lost the interest you would have paid
over the course of the loan. Penalties and terms regarding
early payoff are typically included in the “terms and
conditions” section of your loan agreement. Be certain
you know what’s going to happen before you make that
early payment. It may be a better financial decision to put
that money into an interest-bearing account and make payments
as scheduled.
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