Paying off a personal loan ahead of schedule can save you a significant amount in interest. However, some lenders impose prepayment penalties-fees charged if you repay your loan early. Understanding which lenders charge these penalties, how they work, and how to avoid them is essential for anyone considering a personal loan in 2025.
What Are Personal Loan Prepayment Penalties?
A prepayment penalty is a fee that some lenders charge when you pay off your personal loan before the end of the agreed-upon term. Lenders impose these penalties to recoup some of the interest income they lose when a loan is paid off early. While prepayment penalties are more common with mortgages and auto loans, they do exist for personal loans-though they are becoming less common with major lenders.
How Do Prepayment Penalties Work?
Prepayment penalties can be structured in several ways:
- Flat Fee: A set dollar amount, regardless of your remaining balance. For example, a lender might charge $500 if you pay off your loan early.
- Percentage of Balance: A fee based on a percentage of your remaining loan balance, often 1%–5%. For instance, if you have $5,000 left and the penalty is 5%, you’d pay $250.
- Interest-Based Fee: Some lenders charge an amount equal to a certain period’s worth of interest (e.g., one or two years’ interest) if you pay off the loan early.
These penalties may be higher at the start of your loan term and decrease as you approach the end of your repayment period.
Which Lenders Charge Prepayment Penalties?
Most major personal loan lenders do NOT charge prepayment penalties. The best-known banks, credit unions, and online lenders-including those typically ranked among the best for personal loans-allow you to pay off your loan early without any extra fees.
However, some lenders-especially smaller, regional, or specialized lenders-may still include prepayment penalties in their loan agreements. For example:
- Some international or regional banks: As seen in MCB Bank’s 2025 personal loan schedule, prepayment penalties can range from 5%–10% of the principal amount prepaid, depending on the year of the loan.
- Certain online or subprime lenders: These lenders may impose flat fees or percentage-based penalties, particularly for borrowers with lower credit scores.
How to know if your lender charges a prepayment penalty:
- Check the lender’s website for a fee schedule or FAQ section.
- Review your loan’s promissory note or contract carefully before signing.
- Ask the lender directly if a prepayment penalty applies.
If you already have a loan, you can request a payoff statement from your lender, which should disclose any penalties.
Why Do Some Lenders Charge Prepayment Penalties?
Lenders make money from the interest you pay over the life of your loan. When you pay off a loan early, they lose out on future interest income. Prepayment penalties are designed to offset this loss and discourage borrowers from refinancing or repaying ahead of schedule, especially when the loan was offered at a below-average interest rate.
How to Avoid Prepayment Penalties
- Shop Around: Compare multiple lenders and prioritize those that advertise “no prepayment penalties.”
- Improve Your Credit Score: Borrowers with higher credit scores are often offered loans with fewer fees, including no prepayment penalties.
- Read the Fine Print: Always review your loan agreement for any mention of prepayment, early payoff, or closure fees before signing.
- Ask Directly: Don’t hesitate to ask your lender if a prepayment penalty applies and how it’s calculated.
Is It Worth Paying Off a Loan With a Prepayment Penalty?
Sometimes, even with a prepayment penalty, paying off your loan early can save you money. For example, if you’ll save $2,000 in interest by paying off your loan early, but the penalty is $500, you’ll still come out ahead by $1,500. Always do the math to compare the penalty against the interest savings.
Key Takeaways
- Most major U.S. personal loan lenders do not charge prepayment penalties.
- Some regional, international, or subprime lenders may still impose these fees.
- Prepayment penalties can be a flat fee, a percentage of the balance, or based on remaining interest.
- Always review your loan agreement and ask your lender directly before signing.
- Compare the cost of the penalty to the interest you’d save by paying off your loan early.
By understanding prepayment penalties and choosing the right lender, you can maximize your savings and avoid costly surprises when repaying your personal loan.