Prepayment penalties are fees charged by lenders if a borrower pays off a loan before the agreed-upon repayment term. These penalties are designed to compensate the lender for the interest income they would have earned if the loan had been repaid according to the original schedule. Prepayment penalties can affect loan rates indirectly by discouraging borrowers from refinancing or paying off loans early. Before signing a loan agreement, carefully review the terms to understand if prepayment penalties apply and how they may impact your borrowing costs.