Prepayment

What Is Prepayment?

Prepayment occurs when you pay part or all of a loan before it’s due.

It may include:

• Extra principal payments
• Paying off a loan early
• Making additional installments beyond the schedule

Prepayment reduces the outstanding principal balance.

Why Prepayment Matters

Because interest is calculated on remaining principal, prepayment lowers total interest costs.

For example:

• A $20,000 auto loan at 6%
• Extra $100 monthly toward principal
• Can shorten payoff time and reduce total interest significantly.

However, always check whether your loan includes a prepayment penalty.

FAQs About Prepayment

Does prepayment always save money?
Yes, if no penalties apply.

Does prepayment hurt credit?
No, prepayments do not hurt your credit.

Related Terms

• Prepayment Penalty
• Principal
• Amortization
• Repayment
• Interest Rate

Back to All Financial Terms