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.
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