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What exactly does the phrase "no prepayment penalty" mean? To illustrate, let's consider the following example:

I borrow an installment loan of $1000 and it says that I need to pay $300 monthly for 10 months. But the loan agreement says there is no prepayment penalty. In that case, I can just pay $1300 on the first due date and be done with the loan? It could be slightly less than $1300, depending on how much of $300 is applied to the principal amount.

Obviously, I read the loan agreement form in detail but there is no detailed explanation of what it meant.

  • You actually took a loan that accrues 200% in interest over 10 months? That's a 328% APR. – D Stanley Jun 30 '17 at 19:40
  • @DStanley i did in the past but now I will be able to payback just in one month, so the insane APR does not really matter that much. Also, those type of loans are the only ones available to people without credit in the US. – dezdichado Jun 30 '17 at 19:44
  • The APR is far higher than that. – JTP - Apologise to Monica Jun 30 '17 at 21:04
  • @JoeTaxpayer Can you share how you calculated it? I used the IRR function and got a 328% annualized rate. – D Stanley Jun 30 '17 at 22:02
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    Nope. Sorry, you got it exactly right. Not sure what I was thinking. Actually, I do. I forgot to include the fact that the $1000 is paid off after month 10. In my head I was annualizing 30%/month. And getting 2000%+. My bad. – JTP - Apologise to Monica Jun 30 '17 at 22:23
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In that case, I can just pay $1300 on the first due date and be done with the loan?

For a normal loan, you pay $1,000 plus whatever interest has accrued, which will probably be less than $300. However, since the terms you state seem like a "pay-day" lender loan, there could be other conditions that would make it more punitive - for example, were any fees wrapped into the loan that would need to be paid as well? Is there any mention of interest being paid first, meaning you would need to pay the entire $3,000 even if you paid in the first month? Thankfully I don't have any personal experience with these lenders but I wouldn't be surprised to see these or other terms.

Some loans will come with prepayment penalties, which helps ensure that the bank gets the interest from the loan over time.

It's less common on consumer loans, but it needs to be explicitly stated on all loans so there is no ambiguity.

  • Thanks, I just need to be sure absolutely certain about what I thought it meant. Also, I understand that it won't be necessarily be exactly $1300, but something very close depending on the APR. – dezdichado Jun 30 '17 at 19:41
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    I added some other possible ways that you can get screwed by loan sharks - hopefully you can get out just paying $1,300. – D Stanley Jun 30 '17 at 20:02
  • I'd be deeply suspicious. With a "normal" loan (especially a mortgage) several answers on PF&M stress that when repaying early, it is vital to ensure such payments are marked as reducing the principal, and not simply "prepayment" of the normal monthly amounts. I have a feeling they are saying if you do "prepay" the normal amounts, you won't be penalised (but will still pay the full interest charge)... what they are not saying is that there isn't a penalty for paying-down the premium (which would reduce the amount of interest paid, and probably is penalised). – TripeHound Jun 18 '19 at 6:39

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