Legal Definitions - prepayment clause

A prepayment clause is a provision in a loan document that allows a borrower to pay off a debt before its due date without any penalty. This means that the borrower can pay back the loan early without having to pay extra fees or charges.

John took out a loan to buy a car. The loan agreement had a prepayment clause that allowed him to pay off the loan early if he wanted to. After a few months, John received a bonus at work and decided to pay off the loan in full. Because of the prepayment clause, he was able to do so without any penalty.

The example illustrates how a prepayment clause can benefit a borrower by giving them the flexibility to pay off their debt early without any additional costs.