What is the term for a penalty imposed when a loan is paid before it is due?

The term for a penalty imposed when a loan is paid before it is due is called a prepayment penalty. This type of fee is designed to protect lenders from the loss of interest income that occurs when a borrower pays off a loan early. Lenders often include this provision in loan agreements, particularly in mortgage and commercial loans, to recoup some of the costs associated with the loan issuance and to incentivize borrowers to maintain the loan term.

Prepayment penalties serve as a deterrent for borrowers who might otherwise refinance or pay off loans sooner than originally agreed upon, which interrupts the lender's anticipated cash flow. These penalties can vary in amount and may depend on how early the loan is paid off.

In contrast, a late fee is a charge applied when a borrower fails to make a payment on time, which serves a different purpose. A foreclosure fee is associated with the costs a lender incurs when they need to repossess a property due to default. A default penalty typically relates to the consequences of failing to adhere to the terms of a loan agreement, which also does not involve early payment. By understanding these distinctions, it becomes clear why the prepayment penalty is the correct term for this specific scenario.