A prepayment penalty is a fee that some lenders charge when borrowers pay off all or part of a loan before the term of the agreement ends. In effect, prepayment penalties dissuade the borrower from paying off a loan ahead of schedule, which causes the lender to miss out on interest income. The best way to avoid a prepayment penalty is to work with a lender that doesn’t charge one. At LendingClub, for example, you can make extra payments or pay off your loan in full at any time with no additional charges.