If a loan has a prepayment penalty, there will be an additional cost to repay the loan early:
A) if the loan is repaid before the first payment is due.
B) if the lender wants to recover part of the full interest that would have been earned.
C) if the borrower has defaulted on any monthly payment.
D) if the loan is not repaid before the loan maturity date.
E) if the loan is prepaid 3 months before the loan maturity.

Question

Quizplus · Accepted Answer

A prepayment penalty is a fee charged by a lender to a borrower who pays off a loan before it is due. The penalty is designed to compensate the lender for the interest and fees that they will lose as a result of the early payment. Therefore, option B is correct as prepayment penalty is charged to recover part of the full interest that would have been earned.

If a Loan Has a Prepayment Penalty, There Will Be