Which clause is associated with a penalty for prepayment?

• A. Lock-in clause
• B. Prepayment clause
• C. Late payment clause
• D. Acceleration clause

Answer: (A)

Penalties for paying off a loan early are tied to a provision that restricts prepayment. A lock-in clause is one that keeps you from exiting the loan on your own terms within a specified period and can include a fee if you do prepay. This setup protects the lender by ensuring they still earn the expected interest for a set time, so the prepayment would come with a penalty under this clause.

In contrast, a late payment clause governs penalties for missing due dates, an acceleration clause triggers immediate repayment if there’s a default, and a prepayment clause generally describes whether and how you can repay early (but the specific penalty mechanism is most clearly associated with a lock-in provision).