A prepayment penalty is a fee charged by a lender when a borrower pays off their loan early. This fee is typically a percentage of the loan balance, and it can range from 1% to 5%. Prepayment penalties are designed to compensate the lender for the lost interest income that they would have earned if the loan had been paid off according to the original schedule.
There are several reasons why you might want to avoid paying a prepayment penalty. First, it can save you money. If you have the financial means to pay off your loan early, doing so can save you a significant amount of money on interest. Second, it can give you more flexibility. If you pay off your loan early, you will no longer be obligated to make monthly payments. This can give you more financial freedom and flexibility.
