What You Should Know About Prepayment Penalties

Prepayment penalties just seem wrong. It doesn’t seem like you should be able to be punished for going above and beyond to deliver something better (or sooner) than what you had promised. Despite that, prepayment penalties on loans are legal and enforceable due to the fine print found in many of them, especially payday loans.

Let's take a step back. What exactly are prepayment penalties? These are clauses written into loan agreements that allow the lender to enact a financial penalty on the borrower for paying off (or significantly paying down) the principal of a loan before its specified term is over.

As these lenders see it, you don't just owe them for the money you borrowed and the interest it accrued during the length of time you had it. Instead, they feel they should recoup the full value of the loan (and potentially more) no matter how long you actually have the money.

Here's a hypothetical example. For simplicity's sake, let's say you borrowed $10 from your friend on Monday and agreed that you'd pay her back on Wednesday. Five minutes later, you find $10 in your pocket and decide you'll pay her back right away. She gladly accepts your $10, but regretfully tells you about her prepayment penalty. In addition to the money she borrowed you, she insists that you pay her $2 for paying early. Some friend, right?

While that scenario is oversimplified, it provides an example of how and why some lenders try and enact prepayment penalties. The benefit can be twofold for payday lenders. They can not only ensure that they get every bit of interest in the loan agreement, but they can also turn an additional profit if they set the prepayment penalties high enough that they exceed the interest they would have received if the loan lasted the full term.

How do I avoid prepayment penalties?

So, at first glance, prepayment penalties seem pretty unfair. And when you look more closely, it doesn't get any better. Fortunately, there are ways that you can avoid falling victim to prepayment penalties. The first step is to read the fine print.

Let's be honest: This isn't going to be fun. And it's going to be hard to stay awake. But it is vitally important that you always read the fine print when you are entering a loan agreement. Grab a cup of coffee if you need to, or get a breath of fresh air. And then, dive in.

Why is it important to read the fine print? Because the best way to avoid prepayment penalties is to avoid entering into a loan agreement that includes them. Payday lenders and other companies are counting on you NOT to read the fine print, so they can sneak the prepayment penalties past you.

Another option is to ask your lender outright about prepayment penalties. Be very straightforward: "Are there any prepayment penalties associated with this loan?" If the answer you receive is anything other than an absolute "no," you may be dealing with an untrustworthy lender.

Avoid prepayment penalties with Spotloan

At Spotloan, the answer is very easy. You always have the freedom to pay off your Spotloan at any time with absolutely no prepayment penalty. No questions asked, and no prepayment penalties, ever. That's because Spotloans are installment loans and not payday loans.

With Spotloan, you pick your loan amount and payment size. After that, you can decide to make regular scheduled payments or pay the loan off early. Whatever you choose, we’ll work with you to keep you and your loan on track.

There are many factors you should consider when taking out a short-term loan, whether it’s a payday loan or a Spotloan that gives you more options. Prepayment penalties are an important one. Do you want a lender that will penalize you for doing better than you promised?

The bottom line is that you may be in need of a short-term loan because you feel like you’re out of options. If the loan you choose includes prepayment penalties, it takes away even more of the few options you have. And it punishes you for going above and beyond.

That just doesn’t seem fair.