QandAs: Loans

What is a Prepayment Risk?

Answer:
Prepayment risk refers to the risk to a lender

or investor to not receive the expected result from a financial transaction. The risk is different depending upon if it is regarding the lender or investor.

For a lender, there is a prepayment risk in each loan or transaction, as the lender can never be completely sure that a borrower can and will pay the loan back on time. Many lenders check the applicant’s credit score and income level for this reason, in order to see if the applicant has a history of paying off loans in a timely fashion and the income to enable him or her to do so.

For an investor, a prepayment risk usually refers to the purchase of bonds. Investors generally hope that the bond will be allowed to mature, as an early call means a smaller return on the investment.


	more Q&A sessions like this
	What is a Prepayment Penalty? What is a Loan Mod? What is Loan Default? What is Loan Deferment? What is Loan Delinquency? What should I look for in an Online Mortgage Lender? What Paperwork is needed for a Mortgage Loan Application? What is Repossession? What is a Sub Prime Mortgage? What are typical application fees for a mortgage loan? What Is PMI? What is Loan Servicing Fraud? What Is A Mortgage Broker? What is a repossessed car? What is a Home Appraisal? What is Foreclosure Fraud? What is Home Equity Fraud?