Around 18% of personal loans still have prepayment penalties. That's according to a 2025 industry report I read while waiting for my car's oil change. I was so annoyed I almost dropped my phone.
A prepayment penalty means you pay a fee if you pay off your loan early. Yes, you read that right. The bank charges you for trying to save money on interest. It's like being fined for returning a library book early.
I had a client — I'll call her Patricia — who won a small inheritance and wanted to pay off her $15,000 personal loan. She'd been paying 14% for two years. She called the bank and asked for a payoff quote. They said $10,800 for the remaining balance plus $450 for early payment.
She was furious. She'd never heard of a prepayment penalty. It was buried on page 4 of her loan agreement, in 8-point font. She almost paid it anyway, just to be done. I told her to wait.
We ran the numbers. Patricia had 18 months left on her loan. The total remaining interest was around $1,200. The penalty was $450. Even with the penalty, paying off early saved her around $750. So she went ahead and paid it. But she was still angry — and rightfully so — that the bank tried to punish her for doing the smart thing.
Here's how to avoid this: before you sign any loan, ask two questions directly:
- "Does this loan have a prepayment penalty?"
- "If yes, what's the formula and how long does it apply?"
Many loans only have a penalty for the first two or three years. After that, you can pay it off for free. Some loans have a "soft" penalty — they charge a fixed fee (like $200) regardless of how much you owe. Others use a percentage of the remaining balance (like 2%).
If a lender refuses to answer clearly, walk away. There are dozens of lenders who don't charge prepayment penalties. Credit unions rarely have them. Some online lenders (like SoFi and LightStream) don't either. (I'm not endorsing them — just stating facts from my clients' experiences.)
The Fed might cut rates later this year. If you have a loan with a prepayment penalty, refinancing might trigger that penalty. So do the math: compare the penalty against the interest savings from a lower rate. Sometimes it's worth paying the penalty to get a much lower rate. Other times, it's better to wait until the penalty period ends.
I will keep posting updates on this. Check back soon.
P.S. Patricia still banks at that same institution because she said switching was too much trouble. I told her it wasn't. Some people don't listen. Oh well.