Skip to content
GLOSSARYTERMS AS A CREDIT DESK USES THEM

Prepayment fee (early repayment fee)

What is a prepayment fee, and how is it different from a break cost?

ONE OF 366 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A prepayment fee is a charge, set in the facility agreement, for repaying a loan before its maturity, usually a percentage of the amount repaid that steps down over time, such as 2% in the first year and 1% in the second. It compensates the lender for the margin it expected to earn and the cost of putting the money back to work, and it applies whether interest rates have moved or not. Private credit lenders often use stronger versions, including a make-whole payment roughly equal to the present value of the interest they would have earned up to an agreed date.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

A break cost recovers the lender's actual loss from unwinding fixed-rate funding and can be nil if rates have risen; a prepayment fee is a set charge agreed in advance, whatever rates have done.

// WORKED IN

// NEXT TO IT

PRICING AND FEES

All 366 terms on one page