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What is mean by prepayment penalty? What is the use of it?
Answers (3)
Thread Starter
Vijay KAnd also give one example, please
If you take a loan for 3 years and prepay it after 1 year - the lender will charge a penalty for pre-payment of the loan usually a few % age points of loan value - this is to compensate the lender for loss of income. The lender would have borrowed it from somewhere ( or taken an FD from an account holder) and then lent you the moment - The lender tries to match assets and liabilities cashflows. based on your loan, they took an FD. if you prepay loan how will they pay interest on the FD ? they will have to give a fresh loan to someone else and do all process again- hence they charge a prepayment penalty
