Definition: Loans containing prepayment penalty clauses allow a lender to collect extra money if the loan is prepaid above a certain percentage. This money often amounts to six-months of unearned interest. If a $100,000 loan at 6% is paid off within the first five years, for example, the prepayment penalty would equal $3,000.
Examples: Sub-prime loans often contain a prepayment penalty if the loan is paid in full within the first two years.
