Contract trap · Loan and credit
Prepayment penalty
A fee or extra interest for paying early, 'precomputed' interest that front-loads finance charges so early payoff barely reduces the balance, a moratorium requiring lender consent, or refusal to refund prepaid add-on premiums.
- Severity
- Serious
- How often it turns up
- Regular
- Holds up?
- Depends where you are
- Clause phrases
- 17
What it looks like in a contract
Redline matches these phrases against your document verbatim. Drafters rarely invent new wording — they copy it, which is why the same sentences turn up across unrelated contracts.
In English-language contracts
- prepayment penalty
- precomputed interest
- Rule of 78
- sum of the digits
- rebate of unearned finance charge
- you may prepay subject to
- prepayment fee of
- interest will be computed as if
- minimum finance charge
In Russian-language contracts
- комиссия за досрочное погашение
- штраф за досрочный возврат
- досрочное погашение только с согласия Банка
- мораторий на досрочное погашение
- досрочное погашение возможно только в дату очередного платежа
- проценты за весь срок кредита
- неустойка за отказ от кредита
- уведомление не менее чем за 30 календарных дней
Check your own contract
Paste a clause, a page or the whole document. Nothing leaves your browser: the matching runs here, on this page, against the phrases above.
Why it bites
Refinancing or selling the car costs thousands; the payoff quote is far higher than the remaining principal; financed insurance/GAP premiums are not rebated.
Is it enforceable where you are
The same clause can be routine in one country and void in another. What follows is what the law says where you are — not advice on your particular contract.
In the US, TILA/Regulation Z governs disclosure and the CFPB polices unfair practices; in the EU, the Consumer Credit Directive and Directive 93/13 apply, and the CJEU has repeatedly struck price and rate clauses that a borrower could not have understood.
United States
Allowed on many consumer/auto loans (state law varies); Rule of 78s banned for consumer loans over 61 months (15 U.S.C. §1615); TILA requires disclosure of any prepayment penalty.
- Cited
- 15 U.S.C. §1615
- TILA
European Union
CCD 2008/48 Art 16: right to repay early with compensation ≤1% (0.5% if under a year remains); CJEU C-383/18 Lexitor (2019) — the reduction must cover all costs including fees; retained in CCD2.
- Cited
- C-383/18
- CCD2
United Kingdom
Statutory right to settle early with a rebate (CCA 1974 ss. 94-95; Early Settlement Regulations 2004); the lender may add at most 28 (or 58) days' interest.
- Cited
- CCA 1974 ss. 94-95
- Early Settlement Regulations 2004
Russia
Banned: 353-ФЗ ст. 11 — repay within 14 days (30 for targeted loans) without notice, afterwards with 30-day notice or a shorter contractual period; fees or penalties for early repayment ущемляют права потребителя (ВАС РФ № 146); partial prepayment may be limited to scheduled payment dates; premiums for credit-linked insurance refunded pro rata on full repayment (ст. 11 ч. 10-12).
- Cited
- 353-ФЗ
- ст. 11 ч. 10
Where this has actually happened
Regulator actions, court rulings and the contracts they were fought over.
- CJEU C-383/18 Lexitor (11 Sept 2019) — early repayment must reduce all costs of credit, not just interest
- CFPB v. Toyota Motor Credit (Nov 2023) — failed to refund unearned GAP and credit-life premiums on early payoff; $60M order
What to do
In order, from the thing that takes a minute to the thing that takes a letter.
- Confirm 'simple interest' and 'no prepayment penalty'
- For precomputed loans demand the payoff quote and rebate method
- In EU/UK/RU statutory early-repayment rights override the contract — cite them and demand pro-rata refund of premiums.
Traps that travel with it
Drafters who use one of these usually use several.