What do prepayment penalties allow lenders to secure?

Prepayment penalties are designed to protect lenders from the loss of future interest income that would have been earned had the borrower continued to make regular monthly payments over the life of the loan. When a borrower pays off their mortgage early, whether by refinancing or selling the property, the lender essentially loses the expected interest payments they were counting on receiving. By imposing a prepayment penalty, lenders can recover some of this lost income, ensuring that they are compensated for the risk of early repayment.

This practice is especially common in fixed-rate loans, where the lender benefits from predictable interest income over time. When a borrower opts to pay off the loan early, the prepayment penalty serves as a deterrent and as a financial cushion for lenders. Therefore, the correct answer reflects the lender's need to secure future interest payments that would have been generated throughout the loan term.

The other options refer to principal payments, initial loan amounts, or loan origination fees, which do not accurately represent the intent or purpose of prepayment penalties. Prepayment fees are specifically tied to the interest income anticipated by lenders and are not connected to the principal payments or the initial amounts of the loan itself. Hence, the focus on securing future interest makes the third option the most accurate understanding of pre