What is the provision that allows a borrower to pay off the loan early and may specify penalties or lack thereof?

• A. Prepayment clause
• B. Acceleration clause
• C. Default clause
• D. Late fee clause

Answer: (A)

Paying off a loan early is governed by a prepayment clause. This part of the loan agreement spells out whether you’re allowed to repay the loan ahead of schedule and what, if any, penalties apply for doing so. Some prepayment clauses impose a prepayment penalty to compensate the lender for the interest they’ll miss, while others let you pay early with no extra cost or with restrictions such as a specified window when no penalty applies. This concept is different from an acceleration clause, which flips the loan to full due if a default occurs; a default clause, which describes consequences of missing payments; and a late fee clause, which charges for payments made after the due date.