SoFi

A frequently offered nugget of financial wisdom is to use unexpected financial windfalls to pay down your debt. But what happens when paying down your loans comes with a prepayment penalty?

The best way to avoid prepayment fees, of course, is to choose a personal loan or mortgage without prepayment penalties. If you’re stuck with a prepayment penalty on your loan, however, all is not lost. There are ways to avoid paying loan prepayment penalties.

What Is a Prepayment Penalty?

A prepayment penalty is when a lender charges you a fee for paying off your loan before the end of the loan term. It can be frustrating that a lender would charge you for paying off a loan too early because it’s natural to think a lender would appreciate being repaid as quickly as possible.

In theory, a lender would appreciate getting repaid quickly. But in reality, it’s not that simple. Lenders make most of their profit from interest, so if you pay off your loan early, the lender is possibly losing out on the interest payments that they were anticipating. Charging a prepayment penalty is one way a lender may recoup their financial loss if you pay off your loan early.

Lenders might calculate the prepayment fee based on the loan’s principal or how much interest remains when you pay off the loan. The penalty could also be a fixed amount as stated in the loan agreement.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Can You Pay Off a Loan Early?

Say you took out a $5,000 personal loan three years ago. You’ve been paying it off for three years, and you have two more years before the loan term ends. Recently you received a financial windfall and you want to use that money to pay off your personal loan early.

Can you pay off a personal loan early without paying a prepayment penalty? It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some don’t. A mortgage prepayment penalty is more common than a personal loan prepayment penalty.

Recommended: When to Consider Paying off Your Mortgage Early

Differences in Prepayment Penalties

The best way to figure out how much a prepayment penalty would be is to check a loan’s terms before you accept them. Lenders have to be upfront about how much the prepayment penalty will be, and they’re required by law to disclose that information before you take on the loan.

Personal Loan Prepayment Penalty

If you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $125 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Prepayment Penalty

When it comes to mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can impose prepayment penalties. If you took out a mortgage before 2014, however, you may be subject to a mortgage prepayment penalty. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

Checking for a Prepayment Clause

Lenders disclose whether or not they charge a prepayment penalty in the loan documents. It might be in the fine print, but the prepayment clause is there. If you’re considering paying off any type of loan early, check your loan’s terms and conditions to determine whether or not you’ll have to pay a prepayment penalty.

How Are Prepayment Penalties Calculated?

The cost of a prepayment penalty can vary widely depending on the amount of the loan and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge.

If your loan has a prepayment penalty, figuring out exactly what the fee will be can help you determine whether paying the penalty will outweigh the benefits of paying your loan off early. Here are three different ways the prepayment penalty fee might be calculated:

1. Interest costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the full term of the loan. Using the previous example, if you have a $6,000 loan with a five-year term and want to pay the remaining balance of the loan after only four years, the lender may charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on the loan to determine the penalty fee. This is a common way to calculate a mortgage prepayment penalty fee. For example, if you bought a house for $500,000 and have already paid down half the mortgage, but want to pay off the remaining balance in a lump sum before the full term of your loan is up. In this case, your lender might require that you pay a percentage of the remaining $250,000 as a penalty.

3. Flat fee. Some lenders simply have a flat fee as a prepayment penalty. This means that no matter how early you pay back your loan, the amount you’ll have to pay will always be the prepayment penalty amount that’s disclosed in the loan agreement.

Recommended: Debt Payoff Guide

Avoiding a Prepayment Penalty

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that’s not possible, you may still have options.

If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. You may be offered an opportunity to pay off your loan closer to the final due date and sidestep the penalty. Or you might find that even if you pay off the loan early and incur a penalty, it might be less than the interest you would have paid over the remaining term of the loan.

You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee.

For example, some mortgages allow payments of up to 25% of the purchase price once a year, without charging a prepayment penalty. This means that while you might not be able to pay off your full mortgage, you could pay up to 25% of the purchase price each year without triggering a penalty.

Some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face lower prepayment penalty fees or no fees at all. If that’s the case, it might make sense to wait a year or two until the prepayment penalties are less or no longer apply.

When it comes to your money, you don’t want to make any assumptions. You still need to do your due diligence by asking potential lenders if they have a prepayment penalty. The Truth in Lending Act (TILA) requires lenders to provide documentation of any loan fees they charge, including a prepayment penalty. Also, under the TILA, consumers have the right to cancel a loan agreement within three days of closing on the loan without the lender taking any adverse action against them.


💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

When taking on debt, paying as little as possible on top of the principal amount borrowed is a good general rule of thumb. Consumers generally seek the lowest interest rates they can qualify for, a loan term that they feel comfortable with, and a loan that doesn’t add fees to their debt load.

A prepayment penalty is one fee that can be avoided by asking questions of the lender and looking at the loan documents with a discerning eye.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL1023025
​​

Companies issue earnings frequently, often on a quarterly basis. But knowing how to read an earnings report isn’t easy, and it requires a bit of legwork to get up to speed and understand the financials that businesses are reporting. Even so, it can be important, as those financials may help dictate your next investment moves.

Again, by learning how to read an earnings report, you could unlock invaluable information about the state of a company over time, as well as come to your own conclusions about whether the company’s stock is a worthwhile buy for you.

The Basics of Earnings Reports

When you invest in a stock, you are investing in a small sliver of ownership in a publicly traded company. To be publicly traded, companies are required to file quarterly (and annual) financial statements with the U.S. Securities and Exchange Commission (SEC).

For the uninitiated, looking at an earnings report may be akin to trying to read hieroglyphics. But you can break down the essentials and with some practice, it should all start to make sense.

Understanding the Essentials of Earnings Reports

Again, earnings reports are financial filings that keep shareholders and regulators apprised of the financial and legal standing of a company, typically filed quarterly. Financial transparency also allows current and potential investors to make decisions about the company through their own analysis and judgment.

Earnings reports contain information about company performance and critical metrics such as profits and revenue (or similar terms, like “net income”), and how those metrics compare to previous quarters or years. They also generally include some guidance or comments from company leadership.

The Timing of Earnings Releases

Generally, when you hear someone speaking of a general “earnings report,” they are referring to the forms 10-Q and 10-K, which are quarterly and annual financial filings, respectively. Both disclose a company’s revenue, expenses, profit, and other financial information each quarter.

The Anatomy of an Earnings Report

Some earnings reports are more in-depth than others, but they tend to all have at least some common elements. That includes an income statement (which, again, contains information related to profits, revenues, and losses), balance sheet, cash flow statement insights, and a statement of shareholder equity, which could be a breakdown of a company’s complete financial picture, along with assets and liabilities. In all, the report could be dozens of pages long.

Going deeper, here are some of the key elements.

Income Statement: How much money a company made over a period of time. Usually, the current quarter’s information is compared to previous quarters or multiple quarters.

Balance Sheet: What a company owns and what they owe—its assets and liabilities.

Cash Flow Statement: This section details the exchange of money between the company and the outside world over a given period of time.

Statement of Shareholder Equity: Changes of interest for the company’s shareholders over a given period of time. Here, you’ll find information on the value of all outstanding shares along with the potential dividend payment made by the company during the previous quarter(s).

For many investors, the income statement is of particular interest. This document details how much a company earns, how much it spends, and how profitable it is over a certain period of time. These numbers can reveal a lot about where a business is at and where they’re headed.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Beyond the Numbers: Interpreting Earnings Reports

Understanding the basics of an earnings report is one thing. Using what’s gleaned from those reports is another.

Reading Between the Financial Lines

What does an earnings report actually tell you, as an investor? It’s not always so clear. In that sense, it’s important to try and put the numbers in the report into context so that it can help you plan your next market move – if you make one at all.

Looking deeper at the financials, though, here are some key terms and items to look for, which are typically found in the income statement.

Revenue: A company’s sales. This is also known as the “top line,” because it sits at the top of the cash flow statement. This figure does not take into account the costs of running a business, so may not be the best indicator as to the overall financial health of a company.

Cost of Revenue/Cost of Sales: Directly under the revenue or sales figure you’ll find a section that details the costs of producing the goods sold, such as production and manufacturing. To be clear, these are not all of the costs associated with running a business, only the costs directly associated with the sale of the product or service.

Below this figure, you will find the section referred to as “gross profit” or “gross margin,” which is the cost of revenue subtracted from the revenue. It is called “gross” because the figure is not net of all costs associated with running a business—only the costs associated with sales.

Operating Expenses: These are the costs of running a business that cannot necessarily be attributed to a company’s operations for a given period. Research and development, marketing expenses, and salaries of administrative personnel are all examples.

Here, it is possible to account for depreciation expenses, such as the wear and tear on assets such as machinery and tools or other assets that are used over long periods of time.

At this point in the cash flow statement, a company may account for adjustments to income due to interest earnings or expenses (such as earning interest in a savings account or paying interest on debts) or income taxes. Sometimes, this information is listed separately.

Earnings: This is a company’s profits, also known as the net income or “bottom line,” because earnings exist at the bottom of the cash flow statement after all costs are subtracted. This is the money that the company made in the previous quarter after all costs of running the business are accounted for. Ultimately, this is going to be the number that most concerns shareholders, as a profitable business model is what attracts many investors.

Not all businesses are profitable all of the time, so it is possible that an earnings number can reflect a loss. When a company is recording a loss, the number is written inside of parentheses.

Earnings Per Share (EPS): While the earnings figure is certainly important, it’s helpful to have some context as to what that means to investors. The EPS calculation divides the earnings figure by the number of outstanding shares to derive a figure that represents what it would look like if those earnings were to be evenly spread across all shareholders.

For example, an EPS number of $1 would indicate a $1 earning per share of outstanding stock. However, a $1 EPS does not necessarily mean that’s what the company pays out to each shareholder.

Instead, it’s a way for investors to compare profitability across businesses within the same industry, to a business’s past profitability, or to expectations for a company’s future profitability. More than anything, it is used as a tool for analysis.

For a more qualitative look at a business, you could take a look at the section titled Management’s Discussion and Analysis. Here, executives summarize both the numbers detailed in the financial statements and what’s going on in the business that might not be outwardly obvious simply by looking at the numbers.

For example, executives could take this time to discuss a merger or other market factors that may have led to skewed numbers for that quarter.

Assessing Financial Risk Factors in Reports

All businesses are facing some sort of risk, be it from growing competition in a specific sector, or increasing interest rates. Often, company leadership might discuss those risks in the commentary in an earnings release, or in an accompanying earnings call. Other times, investors can suss out potential risk in the numbers themselves (are revenues in a specific area falling, and why?). The important thing to know is that if businesses are facing some sort of risk, investors may be able to find clues as to how big of a threat those risks are in the filings.

The Earnings Season Explained

Investors are likely to become familiar with the term “earnings season,” and for good reason.

What is Earnings Season and Why it Matters

Earnings season refers to the four times during the year when companies release quarterly earnings reports, and many of them tend to do so around the same time. As such, it’s a sort of “season,” as investors get to dig through several earnings reports and try to suss out trends and make decisions regarding their portfolios.

The Impact of Earnings Reports on Stock Prices

Earnings season can be a volatile time for stock prices, as a company’s performance, put on paper and released to the world, allows everyone to see how it’s doing – and decide whether to buy, sell, or hold their stock. As such, an unexpected earnings report – good or bad – can create volatility in the market. That’s why investors will want to pay attention around earnings season.

Earnings Calls: What to Expect

Investors are able to take part in earnings calls, which often requires tuning in either online or by phone. While every earnings call is different, they tend to have the same elements: Company management (usually the CEO or another C-suite executive) discusses the top-line financial results for the period, and then discusses what’s ahead.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Getting the Most Out of Earnings Reports

As an investor, you’ll want to do what you can with the latest earnings reports. That includes pulling out the most pertinent information, knowing what to anticipate, and then synthesizing it all into actionable insights.

Analyzing the Report: TL;DR for Financial Reports

For most investors, the top-line financials, and perhaps any comments from company leadership, are the most important things to check out in an earnings report. For instance: did the company generate a profit? Was it more or less than expected? Are executives bullish or bearish about the coming quarter? If you’re strapped for time, those are the things you’ll want to know as an investor.

Upcoming Earnings Report Calls: What to Anticipate

Companies generally announce earnings calls well in advance – sometimes even months in advance. That gives investors plenty of time to plan to attend, and to make any pre-earnings market moves. It may be a good idea to read financial media or analyst reports, too, to get a sense of what to expect. Expectations are a huge element in the market, and even if a company reports strong numbers, they may be below expectations, causing share values to fall.

Leveraging Earnings Reports

At the end of the day (or earnings season), earnings reports are tools that investors can use to plan their next moves and hone in their investment strategy. But there are also sub-strategies that they can use during earnings season, too.

Strategies for Investors During Earnings Season

While some investors may find it profitable to day-trade or even swap options during earnings season, many investors may want to try and get a sense of where expectations lie, and position themselves accordingly. For instance, if expectations are that a company’s report will show it lost money, then an investor may want to sell their holdings, anticipating a fall in share prices the day earnings come out.

The opposite can also be true, however. Perhaps the safest play, though, is to stick to a buy-and-hold strategy, and not let any market volatility – earnings-induced, or otherwise – change that strategy.

Things to Consider for Quarterly Reports

As noted, considering top-line financial metrics and company leadership’s posturing is important for investors. But you may also want to think about the context of the earnings report – which quarter, or time of the year is it covering, for instance. If a retail company reports strong Q4 earnings, for instance, that may have been influenced by the holiday shopping season.

Or, if a food company is struggling with higher costs during the summer because of a drought causing shortages, that’s something else. There are lots and lots of factors that can affect a company’s performance.

Using Earnings Reports to Forecast Market Trends

It may be tempting to try and use earnings reports to forecast market trends, but tread carefully – nobody knows what the market is going to do next. There may be some things to be gleaned about what the future holds, but be careful and perhaps consider consulting with a financial professional before making any moves based on hunches.

Again, earnings reports are critical tools and troves of information for investors, but they are backward-looking, and the world is a wild place – you never know what’s going to happen next.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.