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When you're looking for a personal loan, there's a lot of details to consider -- from interest rates to credit score requirements. One extra fee you don't want to get stuck with is a prepayment penalty.
Here, we'll cover what a prepayment penalty is, when it's applied to a loan, and what you can do to avoid it altogether.
A prepayment penalty is a fee some lenders charge if you decide to pay your personal loan off early.
Lenders make their money from the interest paid on loans. When you pay a loan off earlier than expected, you end up paying less in interest. Some lenders see that as a breach of the original agreement. In other words, they loaned you money, but you didn't end up paying them back as much as they expected. They try to make up for that loss by charging a prepayment penalty.
No. Some of the best personal loans charge no prepayment penalty.
A prepayment penalty can cost you hundreds (or thousands) of dollars, so it's worth looking for a loan that won't charge that fee.
The exact fee varies by lender, loan type, and your specific loan agreement. Here are some types of prepayment penalty you might encounter:
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
Here are a few ideas to help avoid paying a prepayment penalty:
Loan shop. Talk to multiple lenders. Work only with lenders that don't charge a prepayment penalty -- regardless of credit score.
Join a credit union. If you have trouble getting approved by a lender that doesn't charge a fee, consider joining a credit union. Credit unions are far more interested in keeping you happy than the average lender, so your chances of avoiding a prepayment penalty are better.
Consider a secured loan. Some lenders will waive the fee if you take out a secured personal loan rather than an unsecured loan. A secured personal loan requires something of value that you own -- like a car, house, investment account, land, or jewelry -- as collateral in return for a loan.
Raise your credit score. Borrowers with high credit scores can sometimes negotiate loan fees. If you have a little extra time, try credit-raising strategies like checking your credit report for mistakes, asking for a higher limit on your credit cards, and paying off credit card debt.
Before signing a loan agreement, ask the lender these four questions:
If the lender does charge a prepayment penalty, read the prepayment penalty clause in the contract. If that clause sparks any more questions, ask before signing.
Here are some other questions we've answered:
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Rates quoted are with AutoPay. Your loan terms are not guaranteed and may vary based on loan purpose, length of loan, loan amount, credit history and payment method (AutoPay or Invoice). AutoPay discount is only available when selected prior to loan funding. Rates without AutoPay are 0.50% points higher. To obtain a loan, you must complete an application on LightStream.com which may affect your credit score. You may be required to verify income, identity and other stated application information. Payment example: Monthly payments for a $10,000 loan at 8.49% APR with a term of 5 years would result in 60 monthly payments of $205.12. Some additional conditions and limitations apply. Advertised rates and terms are subject to change without notice. Truist Bank is an Equal Housing Lender. © 2024 Truist Financial Corporation. Truist, LightStream, and the LightStream logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
*Upstart Loan Disclaimer
The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.
Citi Personal Loan disclaimer:
**Rates as of 05-31-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Loan proceeds cannot be used for post-secondary educational or business purposes.
If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.