Chosen by Asker

Look at it like this, if you lend someone 100 bucks and the deal is he's gonna pay you 12 dollars a month until its all paid back. its gonna be 10 for the debt and 2 dollars for you in interest. So your looking to make 20 bucks when this is all done, but he shows up for the first payment and wants to pay you the whole sum, which is 100, plus the 2 in interest for that month. that means you lose 18 bucks because he is paying early and preventing you from making a profit from future interest. so he turns around and charges you 15 bucks so he at least makes some of what he was supposed to make and you take a penalty charge for paying early. Get it?

Source(s)

I used to be a Shittybanker

by The Seeker

1 month ago

Asker's Rating: 

The prepayment penalty is there so that if you were to pay back the loan early then they would still make some money since they would not make the interest on the account. .

by Michael B- 1 month ago

It is a way to convince you to keep your original agreement in place and let them collect the interest.

by timothy p- 1 month ago

Prepayment penalty is a penalty to prevent you from paying back your loan too soon. People loan money to earn interest on their money. When you pay it back before the loan period, you are subjecting them to re-investment risk (risk that they cannot loan out money to someone else for an equal or higher interest rate). In essence, they are happy that you can pay it off since it makes it less risky for them. But they don't want you to pay it back soon.

by SamGotti- 1 month ago

Prepayment penalties are not very common in loans, but do have some history to them. They are used to help make sure the bank makes the profit it wanted to in writing a certain loan. Typically, they are used for higher interest rate loans, especially when the loan is written for a relatively low amount of money. The reason they are there is that there is a certain amount of administrative paperwork and processing cost that go with a loan, along with the carrying costs of interest that they have to pay their investors in order to provide you with the loan. When they agree to give you the loan, they hope that you will pay on time, but not early, so that they can earn back all of their costs with the interest you pay. People who pay less interest, by paying off faster, cut into their profits. In some ways, it is like the early cancellation penalties they impose on people who want to cash in CDs early. Since there are only 10 days left until November, I agree it's an odd decision on their part, but maybe it's just something in the contract that will automatically be enforced. I would base the decision on just one thing: ask the bank: If I pay this off now, what would the total amount be including the penalty. If I wait until November 1, what would the total amount be, including any penalty? Pick the lower number and act accordingly.

by Lauren F- 1 month ago

they loose that monthly interest charge on the loan, so to make up for that when you pay off early, they charge you that fee.

by rhonda- 1 month ago

They will be unhappy because they will not have their money out earning interest. You basically have to pay them the interest they would have made. Also, if you bought it from a dealer and financed it through the dealer they kicked back a fee to the dealer in anticipation of the interest that they would earn. Out of curiosity, what state do you live in. I know in Illinois, prepayment penalties are illegal.

by Ted- 1 month ago