In one sentence
A charge for repaying a loan before maturity, protecting the lender's expected yield.
The longer version
Prepayment penalties take many forms: step-downs, yield maintenance, defeasance, or lockouts. They compensate the lender for the reinvestment risk of an early payoff, and borrowers weigh them heavily when choosing a lender.
The prepayment structure is negotiated up front and shapes the borrower's future flexibility, so it is a key economic term.
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