Does Your Personal Loan Have A PrePayment Penalty?

When it comes to affording big expenses or paying off debt, personal loans can provide quick funding for Canadians along with the flexibility to use the money however you want.

But before you decide to accept an offer from a lender, you need to look past the monthly payments and APR to decide if it’s right for you. While some lenders might charge origination fees and late payment fees, another to be aware of that some lenders may charge is the prepayment penalty. 

What to Know About a Prepayment Penalty?

Personal loans come with a specified loan term, which is the scheduled monthly payments or amount of time for repayment, which can range from 6 months and up to seven years. 

If you were to pay off a personal loan early and it had a prepayment penalty as part of your agreement, then an additional fee would be charged.

Prepayment penalties are a form of protection some lenders use in the event a borrower was to pay off a loan early, which would be a loss of interest income for the lender.

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What Are The Costs Of A Prepayment Penalty?

The costs behind a prepayment penalty for a personal loan in Canada are usually charged in one of a few ways:

Interest costs – if your agreement has a prepayment penalty based on interest, then the lender is basing the fee for the interest that would have been paid over the term of the loan. For example, if you borrowed $10,000 with a five year term and wanted to pay the balance early after making 2 years of payments, the lender may charge you for 36 months worth of interest. Which is what they would have received if you continued making payments.

Percentage of balance – with some lenders, a percentage is used for the amount still owed on the loan to determine a penalty fee.  For example, suppose you had borrowed $10,000 and paid down half, and decided you would like to pay off the balance ($5,000) as a lump sum when half way through your term of monthly scheduled payments. With a percentage of balance penalty your lender might require you to pay a percentage of the remaining $5,000 owed.

Flat fee – with a flat fee penalty for a personal loan you be required to pay the amount disclosed within your loan agreement, no matter how early you try to pay off early.

A prepayment penalty can actually cost you a lot at times, from a few hundred to thousands of dollars, depending on the amount you borrowed and what fee is being charged. While paying off a loan early might save you from interest charges, if there is a prepayment penalty as part of your personal loan agreement and terms, you should compare the prepayment fees versus the cost for interest. It just might be cheaper to stick with making the monthly scheduled payments. 

Note that a prepayment penalty does not have anything to do with your credit score and that you can request a lender to provide an offer without one.

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Does My Loan Have A Prepayment Penalty?

If you are unsure whether your personal loan might include a prepayment penalty for paying it off early, read your loan agreement. This is where you will find all fees and terms of your loan.

If you are unable to find the information in your agreement, ask your lender. When you are looking or shopping for a personal loan, you are able to see all terms and conditions before signing. This includes all fees, penalties, and anything else related to your loan. 

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If you have already signed a loan agreement and discover that you have a prepayment penalty as part of the terms, this is already part of a contract that is a signed agreement and you would be unable to do anything about this to make it go away.

If your personal loan includes a prepayment penalty and you would like to pay it off early, comparing the payoff to making the payments is often the best way to determine the right option.

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