What "prepayment penalty" means in finance

A prepayment penalty is a fee charged by a lender when a borrower pays off all or part of a loan before its maturity date. This penalty is usually a percentage of the remaining loan balance or a certain number of months' interest payments. The purpose of prepayment penalties is to protect lenders from the loss of interest income they would have earned if the borrower had made all the scheduled payments. Prepayment penalties are commonly found in mortgage loans, car loans, and other types of loans with fixed terms. They may be avoided by negotiating loan terms that do not include prepayment penalties.