Question 1

What is loan prepayment?

Accepted Answer

Loan prepayment means paying extra toward the principal balance each month, each year, or as a one-time lump sum. The extra amount is applied to principal, reducing future interest charges and shortening the loan term.

Question 2

Is it better to prepay or invest?

Accepted Answer

If your loan interest rate is higher than the expected return on investments, prepayment guarantees a risk-free return equal to the interest rate saved. Otherwise investing may yield more, but involves risk.

Question 3

What is the best prepayment strategy?

Accepted Answer

The most effective strategy is to make biweekly payments instead of monthly (one extra payment per year) or add a fixed extra amount to each monthly payment. Lump-sum prepayments early in the loan save the most interest.

Question 4

Are there prepayment penalties?

Accepted Answer

Some loans charge a prepayment penalty for paying off early, especially in the first 3-5 years. Check your loan agreement before prepaying large amounts.