Prepayment Privilege


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.

  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  3. Prepayment

    The satisfaction of a debt or installment payment before its ...
  4. Prepayment Penalty

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

    The risk associated with the early unscheduled return of principal ...
  6. Conditional Prepayment Rate - CPR

    A loan prepayment rate that is equal to the proportion of the ...
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