Beware of Debt Prepayment Penalty

Debt is the sword of Damocles hanging over a persons neck and who doesn't want to be rid of this continuous threat?

Therefore people in debt often think that earlier they can be free of this burden the better. Also, they believe that prepaying a loan will save them money on the interest they would otherwise pay.

Unfortunately the banks and lending institutions are two steps ahead of the borrowers when it comes to money. As they know that there will at least some debtors who will either want to pay off their loans early or will want to transfer their loans to cheaper lenders, they add small print to their lending agreements.

By signing the agreement the borrower accepts that if he prepays the loan he will pay a penalty to cover up for the loss of earnings that the bank will suffer due to this early repayment.

There is no set amount as to what a bank can charge as an early repayment penalty, but it is usually equivalent to one or two month's interest. The earlier in the term the loan is repaid, the higher is the charge. An early repayment penalty can add a considerable amount to the cost of a loan.

Therefore if there is any chance that you will be prepaying your loan, then it pays to shop around or use loan comparison websites like uswitch to find one with the lowest prepayment penalty. It is important to factor the cost of prepayment penalty into the cost of the loan.