How to test a prepayment penalty
Compare the interest saved with the fee charged.
1
Enter the outstanding balance
Use the payoff quote rather than the original loan amount.
2
Add the remaining term
Use the months left on the current schedule.
3
Enter the penalty
Check the loan agreement for the exact formula and any cap.
What does this tool do?
Early repayment avoids future interest but can trigger a fee. Comparing the remaining interest with the penalty shows the net gain or loss.
The Formula
Net saving = Remaining interest − Balance × Penalty %Frequently Asked Questions
How are prepayment penalties charged?
They are often a percentage of the outstanding balance or a set number of months of interest. Check the loan agreement.
Does paying early always help?
No. If the penalty is larger than the interest avoided, keeping the loan or waiting can be cheaper.