Prepayment Clause Law and Legal Definition

Prepayment clause is a loan-document provision that permits a borrower to satisfy a debt before it is due date. It is a clause in a bond or mortgage that gives the borrower the privilege of paying the mortgage indebtedness before it becomes due.

Usually, debt is satisfied without paying a penalty. However, sometimes there is a penalty for prepayment, with waiver of the interest that is not yet due.