Most people are aware that banks and other lending institutions penalize borrowers if they miss or make late payments on loans. However, in some cases, lenders also penalize people if they pay off a loan early or if they simply pay more than the required monthly amount due.

Before borrowing money from a financial institution, it is a good idea to find out about any fees or penalties that can be associated with the loan. For example, find out how much you would have to pay in late fees or penalties if you miss a payment or make a late payment. You also will want to find out whether your bank or lender will penalize you if you pay more than your monthly payment, pay off your loan early, or refinance your loan. You may be required to hold onto a loan for several years and pay interest on the balance for the stated duration of the loan.

Penalties levied against a borrower for paying off a loan early are commonly known as prepayment penalties. Such penalties often apply to mortgages, and they usually are assessed based on a percentage of the remaining mortgage balance or on several months' worth of interest. In some cases, lenders offer loans with prepayment penalties at lower rates than other loans. However, borrowers need to be aware of the risks associated with prepayment penalties, which can substantially increase the cost of refinancing a loan or mortgage.