Most of us are in some kind of debt, though the exact percentage varies by generation. Baby boomers and millennials are slightly more likely to carry debt than Generation X.
Debt is a necessary part of life for most people. While there are many types of loans, the best kind is one you can prepay before its due date.
Prepayment does have some drawbacks. Lenders can charge you a prepayment fee if you pay off a loan sooner than anticipated.
That sounds unusual, but lenders have their reasons for doing so. Read on to find out why you’re sometimes charged a prepayment fee.
Why Prepayment Penalties Exist
What is prepayment? Here’s a home loan for an example.
Let’s say your home loan is $200,000. You get a standard 30-year mortgage. But ten years into it, your grandmother leaves you enough money to pay off your home in full.
You’re sad about your grandmother, but you’re happy about the prepayment. You’re going to own your home free and clear. But check your closing documents before paying off that home loan in full.
Prepayment fees get charged a couple of different ways. You may get charged a flat fee for prepayment. Or you may have to pay a percentage of the interest you would have paid otherwise.
10 or 12 years ago, prepayment penalties were fairly common. They still exist in some places, but other states have made them illegal.
Should You Agree to Prepayment Fees?
Banks want to make money on the interest of your loan. While you’re relieved to pay it early, your bank is disappointed to lose out on that extra revenue.
What do you get for agreeing to a prepayment penalty? In many cases, your interest rate is lower. That’s why it’s so critical to read and comprehend all your paperwork before signing off on it.
If you refuse entirely to deal with a prepayment loan fee, that’s understandable. Ask about interest rates for a loan with no penalty.
Lenders are more likely to charge you a prepayment fee if you have a typical home loan. But if you get your loan through a government program like USDA or FHA, you can’t get charged this fee.
Student loan debt is another big problem in America. Luckily, prepayment loan fees don’t apply here, as well. If you get a sudden windfall, pay off that degree without any hesitation.
What if you take out a loan to help pay some bills? In that case, a prepayment fee is possible.
Many personal loans are, indeed, fast and easy to get. Yet you must still perform your due diligence. If you don’t know what you’re signing, then hold off on that signature.
Prepayment Fees and Loans
A prepayment fee agreement can feel like a hassle. But for most people, it’s better to pay the penalty and still pay off their loan early. Even with the penalty, you should be able to save money in the long run.
A short-term loan with prepayment fees is still acceptable, but when it’s a long-term loan, be very sure of your financial decision.
Image source: GotCredit.com