Prepayment refers to the act of paying debts prior to the day on which they are due.
For illustration’s sake, let’s say Deepak had a loan with a due date of 2024, but he paid it off in 2022. This would be an example of prepayment.
One advantage is the reduction in amount of interest paid.
The interest on the loan won’t need to be paid back by the borrower throughout the whole period of the loan. This is particularly helpful for loans with an interest rate that is calculated using compounded interest.
Some loans, like school loans, provide prepayment options at no additional cost, while other loans, including house loans and personal loans, may impose a fee for early repayment.