What is the name of the clause that outlines a borrower's right to pay off a loan early and any penalties for doing so?

• A. Prepayment Clause
• B. Acceleration Clause
• C. Due-on-Sale Clause
• D. Late Payment Clause

Answer: (A)

When a loan agreement addresses paying off early, it is the prepayment clause that governs this. The prepayment clause spells out whether you can pay more than the scheduled payment to reduce the loan balance ahead of time and whether doing so triggers any penalties. Lenders may allow early payoff without penalties, or they may charge a prepayment fee or a specified percentage of the remaining balance to compensate for lost interest. In contrast, other clauses handle different situations: an acceleration clause makes the loan due in full if you default, a due-on-sale clause requires full repayment if you transfer ownership of the property, and a late payment clause outlines charges when payments are late. So the clause that specifically covers the right to pay off early and any associated penalties is the prepayment clause.