Prepayment is an accounting term for the settlement of a debt or installment loan in advance of its official due date. A prepayment may be the settlement of a bill, an operating expense, or a non-operating expense that closes an account before its due date. A prepayment may be made by an individual, a corporation, or any other type of organization.
Many types of debts and obligations are settled in advance through prepayment. Corporations might prepay rent, wages, revolving lines of credit, or other short-term or long-term debt obligations.
Consumers can prepay credit card charges before they actually receive a statement. Or they might pay a loan off early, by refinancing the debt through another lender or by paying the entire debt out of pocket.
Some loans, such as mortgages, may include a penalty for prepayment. If a loan includes such a penalty, the borrowers must be made aware of and agree to the provision at the time they take out the loan.