Glossary
Prepaid interest
Also called: retained interest, interest retention
Prepaid or retained interest is interest for some or all of the term that the lender deducts from the loan at settlement. The borrower receives a smaller net advance and makes no interest payments during the prepaid period.
An example
A borrower takes a short-term loan with interest for the full term retained. At settlement, the lender withholds the interest along with fees, so the funds paid out are well below the loan amount.
Why it matters
Prepaid interest gives the lender certainty but means the borrower needs a larger loan to receive the same net funds. If the loan is repaid early, check whether any unused prepaid interest is refunded.
Points to check
Check how much interest is deducted at settlement and how the net advance compares with what you need. Ask whether unused prepaid interest is refunded if you repay early. Because the deduction reduces the funds you receive, you may need a larger loan to cover the same costs. Include prepaid interest in your comparison of offers, and confirm in writing how it is calculated.
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