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While people take out personal loans for a wide variety of reasons, they do share one common goal—minimizing their borrowing costs. One way to reduce costs is to find personal loans with no origination fees. Some lenders charge origination fees to cover the costs of processing a personal loan, which is typically taken out of your loan amount as an upfront cost. However, others charge no origination fees, including the lenders below.
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Taking out a loan can be nerve-wracking enough without having to worry about prepayment penalties down the road. As a borrower, you want flexibility – being able to pay down your loan faster if possible, without incurring extra charges. Thankfully, many lenders offer loan products without prepayment penalties, giving borrowers peace of mind. In this article, we’ll explore what prepayment penalties are, their pros and cons, and your best options for loans that don’t have them.
What is a Prepayment Penalty?
A prepayment penalty is a fee charged by some lenders when you pay off your loan ahead of schedule For example, if you take out a 5-year auto loan but pay it off in full after 3 years, the lender may charge you 1-2% of the remaining loan balance as a penalty for early repayment
Prepayment penalties allow lenders to ensure they earn enough interest over the full loan term. If all borrowers paid off early, lenders would lose out on expected earnings. However, for borrowers these penalties limit flexibility and cost extra money.
The Pros and Cons of Prepayment Penalties
From the lender’s perspective, prepayment penalties have some benefits:
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They ensure the lender earns the expected interest payments over the full loan term. This helps offset the costs and risks of lending.
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For lenders funding loans through outside investors, penalties discourage early repayment which could reduce returns to those investors.
However for borrowers the drawbacks outweigh any benefits
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Prepayment penalties take away flexibility. Borrowers can’t pay down principal early without incurring fees.
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They increase costs. You have to pay extra just to pay off your own loan early.
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They discourage refinancing. Even if you could get a lower rate through refinancing, penalties may make it not worthwhile.
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Variable rate loans with penalties remove a key borrower protection. If rates rise, you can’t refinance without fees.
Overall, prepayment penalties heavily favor the lender while limiting options for the borrower.
How Prepayment Penalties Are Calculated
If you have a loan with prepayment penalties, it’s important to understand how the charges are calculated. This helps in evaluating if early repayment still makes sense or not.
There are a few main ways lenders calculate penalties:
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Interest differential – Lender charges a penalty equal to the interest you would have paid over the remaining term. This is the most common approach.
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Fixed percentage – Lender charges a fixed 1-2% (or more) of the outstanding principal balance.
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Time-limited declining – Penalties are highest in the first 1-2 years of the loan, then decline over time. After 3-5 years there may be no penalty.
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State limits – In some states laws limit how much lenders can charge for prepayment penalties. Common caps are 1-3% of the balance.
Always read the fine print to understand exactly how your lender will calculate penalties. This will allow you to run the numbers and see if early repayment still makes financial sense.
How to Avoid Prepayment Penalties
The easiest way to avoid prepayment penalties is simply not to accept loan offers that include them. Plenty of lenders provide loan products without these fees. Below we look at penalty-free options for common loan types:
Mortgages
Most mortgages today do not have prepayment penalties. However, make sure to ask your lender specifically. FHA and VA loans never have penalties. Conventional fixed-rate mortgages also do not. The only risk is with some adjustable-rate mortgages (ARMs).
Auto Loans
Major banks and credit unions typically don’t charge prepayment penalties on auto loans. However, buy-here, pay-here dealers and subprime lenders sometimes do. Always ask upfront.
Personal Loans
Online lenders like SoFi, Marcus, and Lightstream offer personal loans with no prepayment fees. Banks and credit unions don’t charge penalties either. However, payday lenders often do – avoid them.
Student Loans
Federal student loans never have prepayment penalties. Some variable-rate private loans include them, so ask lenders before borrowing.
Business Loans
Small business administration (SBA) loans do not allow prepayment penalties. For conventional business loans, ask lenders to confirm fees in writing first.
Home Equity Loans
Home equity loans and HELOCs from major banks and credit unions do not charge prepayment penalties in most cases. But some subprime lenders do, so inquire first.
The bottom line is you have options. Plenty of reputable lending institutions provide loans without prepayment penalties and the inflexibility they bring.
When Do Prepayment Penalties Make Sense?
Given the drawbacks for borrowers, why do any loans still include prepayment penalties? In some cases, the penalties can benefit borrowers in other ways:
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Loans with penalties may offer lower interest rates, saving money over the full term.
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Penalties allow lenders to approve borrowers they otherwise may not, expanding access.
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In housing bubbles, penalties discourage refinancing and stabilize mortgage markets.
Additionally, some borrowers may intend to hold a loan for its full term anyways. But it’s recommended to still avoid penalties which reduce options down the road.
Overall there are very few cases where accepting prepayment penalties makes good financial sense for borrowers. Be sure to shop around, as penalty-free alternatives are abundant.
How to Pay Off a Loan Early Without Penalties
If you’re stuck with a prepayment penalty loan, all hope is not lost. Here are a few tips for paying it off early without incurring too many fees:
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Time it right. Some penalties decline over time. Wait until they have decreased or expired completely.
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Pay down principal, but leave a small balance. Paying a loan to $100 instead of $0 may let you avoid the penalty.
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Ask for an exception. Discuss your situation with the lender. They may grant a one-time waiver, especially for large loans.
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Refinance with the same lender. Some waive penalties when you refinance within their network.
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Take the hit. If fees are low enough, just pay the penalty and move on.
While frustrating, with a bit of planning you can minimize or avoid prepayment penalties. Don’t let them stop you from making smart financial decisions.
Key Takeaways on Avoiding Prepayment Penalties
Prepayment penalties restrict flexibility for borrowers when trying to pay off loans early. Thankfully, many lender offer loan products without these fees. Here are some key takeaways:
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Shop around and only accept loans that do not include prepayment penalties. Ask lenders to confirm this.
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Mortgages, student loans, and SBA loans will never have prepayment penalties.
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Major banks/lenders don’t charge penalties for auto loans, personal loans, or home equity products.
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Online lenders like SoFi and Lightstream feature personal loans with no prepayment fees.
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If stuck with penalties, time repayments strategically, ask for exceptions, or refinance with the same lender.
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Weigh any interest savings from a penalty loan vs. costs of fees and lack of flexibility.
While prepayment penalties allow lenders to protect their interests, they are rarely beneficial for borrowers. Seek out loans that provide flexibility to pay off principal anytime without extra fees. This opens up options down the road.
Frequently Asked Questions (FAQs)
Not all personal loans come with origination fees. Lenders charge these fees, typically a percentage of the loan amount, to cover the cost of processing the loan. However, numerous lenders in the market offer personal loans without origination fees.
BEST FOR NO INTEREST IF REPAID WITHIN 30 DAYS
Our ratings take into account loan cost, loan details, eligibility and accessibility, customer experience and application process. All ratings are determined solely by our editorial team.
$2,500 to $40,000 Editor’s Take
Discover is an online bank that also offers customers credit cards, retirement solutions and personal loans in all 50 states. As a lending platform, Discover stands out because of its online application and mobile banking tools, well-reviewed customer support team and quick funding.
In general, loans are available from $2,500 to $40,000 and may be issued for between three and seven years. So, while borrowers may get a larger loan from another lender, the repayment terms are fairly flexible. Discover charges a late payment fee and does not offer an autopay discount; however, it does not charge any origination fees or prepayment penalties, making it competitive with other top personal loan providers. Pros & Cons
- No origination fees
- Low interest rates
- Funds can go directly to paying off credit lines
- No interest rate discount for autopay
- No co-signers or co-borrowers accepted
- Good credit needed to qualify
Details
Eligibility:
- Minimum credit score: 660
- Minimum income: $25,000
- Co-signers. Not permitted
- Co-borrowers. Not permitted
60MonthLoansPersonal Loans Review. $2,500-$10,000. Soft Credit Check. No prepayment penalty.
FAQ
What loans do not have prepayment penalties?
How can I avoid prepayment penalty on my loan?
What states do not allow prepayment penalties?
Do personal loans have a prepayment penalty?
It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some don’t. A mortgage prepayment penalty is more common than a personal loan prepayment penalty. Recommended: When to Consider Paying off Your Mortgage Early
Can a prepayment penalty be avoided?
A prepayment penalty is one fee that can be avoided by asking questions of the lender and looking at the loan documents with a discerning eye. This may hold true both when you are shopping for a loan and when you are paying your loan off. Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead.
Do lenders charge a prepayment penalty?
Lenders disclose whether or not they charge a prepayment penalty in the loan documents. It might be in the fine print, but the prepayment clause is there. If you’re considering paying off any type of loan early, check your loan’s terms and conditions to determine whether or not you’ll have to pay a prepayment penalty.
How much does a prepayment penalty cost?
A prepayment penalty can cost you hundreds (or thousands) of dollars, so it’s worth looking for a loan that won’t charge that fee. The exact fee varies by lender, loan type, and your specific loan agreement. Here are some types of prepayment penalty you might encounter: