Prepayment Penalty Law and Legal Definition

Prepayment penalty is a charge assessed against a borrower who elects to pay off a loan before it is due. It is a fee that a lender may assess if a borrower repays a loan before the scheduled maturity. The prepayment penalty is used to discourage early payment of loans since it deprives the lender of future interest payments.

A prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a hard prepayment penalty. A prepayment penalty that applies to refinancing only is called a soft prepayment penalty.