The term 'Repayment Penalty' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
A repayment penalty is commonly associated with paying back a loan before the end of its term. If you are contemplating paying off your loan balance in advance of its due date, then you should be aware that a number of loans come with these repayment penalties for liquidating the balance early. Different types of loans utilize different names for these same fees. Repayment penalties can also be called redemption charges, early redemption fees, prepayment penalties, or financial penalties.
The fees associated with repayment penalties vary depending on the loan in question. These repayment penalties are commonly stated as a percentage of the balance that is outstanding when prepayment is offered. Alternatively, they might be figured up as a certain number of months of interest charges. In general, when they are figured up using months of interest, they are comprised of one to two months’ interest in fees. The sooner in the loan’s life that you choose to repay the loan, the greater amount of charge you can expect to pay. This is because the anticipated interest portion of the loan comprises a great part of the repayment earlier in the loan’s time frame. Early repayment penalties might increase the total cost of your loan significantly.
If you wish to avoid a repayment penalty in paying off your loan in advance of the term’s end, then you will have to be aware of the loans that come with these fees and the ones that do not. Even if you change a currently existing loan into a loan for debt consolidation, you will have to cover the early repayment penalty if one is in the terms. The only way to avoid early repayment penalties is by selecting loans that specifically do not have ones attached to them. It is ironic that some of the least expensive loans out there do not include repayment penalties for early pay off actions.
Another factor of repayment penalties involves a gradual disappearance of the provision over time. With many mortgages, these repayment penalties gradually go down over the years of the mortgage. After the fifth year, the majority of repayment penalties no longer even apply. In many cases, repayments of as much as twenty percent of the original balance are permitted in a given year without you having to be penalized.
Besides this, there are different kinds of penalties for repayments. Penalties that only apply to your refinancing of the mortgage are called soft penalties. Penalties that include the sale of the house and a refinancing are known as hard penalties.