Early Extinguishment of Debt

Early Extinguishment of Debt

The payment of a debt in full before it is due. Early extinguishment of debt is good for the borrower because it relieves him/her of the debt, but it deprives the lender of interest he/she would have received otherwise. As a result, some lenders attach prepayment penalties to loans to disincentivize early extinguishment. Early extinguishment of debt is also called prepayment, which has other meanings as well. See also: Prepayment risk.