What is prepayment?

A prepayment is any payment of a debt before it actually becomes due. It also pertains to the unscheduled partial or complete payment of the principal amount outstanding on a loan, such as a mortgage, car note, student loan or another loan, before the end of terms.

Mortgage prepayment example

Any amount paid to reduce the principal balance of a loan before the due date or payment in full of a mortgage. This can occur with the sale of the property, the pay off the loan in full, or a foreclosure. In each case, full payment occurs before the loan has been fully amortized.

In some cases, prepayments may result in a prepayment penalty.