Prepayment Penalty (PrePay)
A fee charged by the lender if the borrower pays down or pays off the loan earlier than allowed under the note.
Definition
A prepayment penalty (often shortened to PrePay) compensates the lender for lost interest and the cost of putting the loan on the books when a borrower prepays before maturity or outside a permitted window. Structures vary: step-down percentages (for example, 5-4-3-2-1), yield maintenance, or defeasance on some fixed-rate products. Open prepayment after a lockout or step-down period is common on bank loans. On small bay deals, PrePay terms matter when you plan to refinance, sell, or restructure debt early—the penalty can erase much of the economic benefit of a rate cut or sale.
Example
A $1,400,000 loan has a 3% prepayment penalty in year two. Paying it off early costs 0.03 × $1,400,000 = $42,000, before any other exit or reconveyance fees.
See Also
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