DEFINITION of 'Prepayment Privilege'

The right given to a debt holder to pay all or part of a debt prior to its maturity or ahead of schedule, usually without risk of penalty. Prepayment privileges are often elements of such debts as mortgages or automobile loans. They are in opposition to a prepayment penalty, which is the amount set by the lender as a penalty to the debtor for paying off a debt prior to its maturity in order to recoup a portion of the lost interest the lender had planned to earn.

BREAKING DOWN 'Prepayment Privilege'

Fixed-income securities that incorporate prepayment privileges are considered riskier to the debt holders because they are not certain as to when they will receive the cash flow of incoming funds. Prepayment tends to occur when interest rates are low and mortgage refinancing is viewed as favorable.

RELATED TERMS
  1. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
  2. Prepayment

    The satisfaction of a debt or installment payment before its ...
  3. Prepayment Model

    A model used to estimate the level of prepayments on a loan portfolio ...
  4. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  5. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  6. Constant Percent Prepayment

    Annualized estimate of mortgage loan prepayments, computed by ...
Related Articles
  1. Investing

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  2. Investing

    Defeasance Reduces Commercial Real Estate Fees

    Try this alternative to short-term variable-rate financing when using leverage to buy property.
  3. Investing

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  4. Personal Finance

    Top 10 Common Mortgage Scams To Avoid

    How do you know which companies to avoid? Look for these telltale signs.
  5. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  6. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  7. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  8. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  9. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
RELATED FAQS
  1. Do FHA loans have prepayment penalties?

    Learn whether FHA loans have prepayment penalties, and find out the rules governing interest charges when prepaying your ... Read Answer >>
  2. Do prepayments provide working capital?

    Learn how prepayments for various services such as insurance, rent and supplies are included as part of a company's current ... Read Answer >>
  3. I made involuntary contributions to a retirement plan while temporarily employed. ...

    Your options depend on the type of penalty that would apply. If the penalty is a surrender charge or another penalty that ... Read Answer >>
  4. What are the main categories of debt?

    Learn about the different types of debt available for consumers including secured debt, unsecured debt, revolving debt and ... Read Answer >>
Hot Definitions
  1. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  2. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  5. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  6. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
Trading Center