A prepayment penalty is a fee that some lenders charge if a borrower repays a loan ahead of the agreed schedule. This fee is intended to compensate lenders for the interest income they lose when a loan is paid off early. Prepayment penalties can be found in various types of loans, including mortgages, personal loans, and auto loans. The penalty amount depends on the terms set by the lender and is usually calculated as a percentage of the loan balance or a set number of months’ worth of interest.