Wasn’t there a federal regulation issued some years ago prohibiting credit-card companies, mortgage companies, etc., from penalizing a customer who pays off a balance early (Apparently depriving the company of potential interest income)?
AFAIK, you can always pay off your credit card debt in full or part at any time. I don’t know about mortgages, but I think you can always pay them off if you sell the house. In fact you have to.
Thanx 
If there is a prepayment penalty, it must be specified in the contract you sign. Prepayment penalties used to be common in mortgages but I haven’t heard of them in current mortgages. Paying points when a mortgage is originated could be considered a form of prepayment penalty. You’re just paying it on the front end instead of when you pay the loan off early. Unheard of for credit cards. Consumer loans sometimes have backdoor prepayment penalties where to pay the loan off early you have to make all payments including all the interest you would have paid if you were to make the payments as scheduled. Always read and understand the contract before signing.
The company involved is specifically Citi Health Card, and involves a loan my Mom got to pay for dental work. She apparently got the idea that if she paid off the balance she would be penalized by the company.
A loan for medical work sounds different than a credit card to me, so different rules may apply.
But I pay my standard credit cards off at least every two weeks, if not weekly, no problem.
This is a medical credit card and is a little different than a regular credit card. They apparently work on a deferred interest model and you get a promotional period with 0% interest. If you pay it off within that promotional period, you pay 0% interest, but if you go over by even a day you will pay all the interest that was deferred.
This basically means that you will be penalized for not paying it off early (i.e. within the promotional period).
This is incorrect thinking. She has a zero percent interest loan. If she exceeds the agreed upon loan limit, she has to pay interest on the entire length of the loan. Lots of companies due this, especially retail furniture stores. They make money because they know most people will exceed the agreed upon loan length, often because they fail to calculate they can’t afford buying the item in the first place under the terms agreed upon in the loan.
Just a question: do you have a balance? If not, why do you do this?
I have no balance. I mainly do it because I’ve found it’s easiest for me to keep on top of my bills if I just spend 15-20 minutes every Sunday going through them. I pay any bill that’s come in, plus I kill any balance on my credit cards. Yes, technically I’m giving the bank a small loan by doing that, but the amount of interest I could earn by keeping that cash for another 2-3 weeks is negligible, and well worth the benefits I’ve personally found from having it be a routine.
Isn’t that exactly what ethelbert said?
Prepayment penalties still exist in the “hard money” mortgage business.
Yes, it is possible to get a mortgage even with bad credit, but you pay and pay and pay.
It’s quite common to have prepayment penalties for mortgages in cases of fixed-rate mortgages (i.e., where the interest rate is fixed in the contract for a long period of time, rather than floating). Without such a penalty, fixed-rate mortgages would be sure to bring losses to the banks: If interest rates go up, customers will happily pay the old, lower rate; if rates go down, customers refinance with a cheaper loan elsewhere and pay off the more expensive earlier mortgage. In essence, banks would lose money in the first case without the chance of making money if the market moves in the opposite direction, i.e., in the second case. To compensate for that risk, they stipulate a prepayment penalty.
They would make less than they expected, but they wouldn’t actually lose money. They’d still be getting the principal back plus closing costs and some interest.
The bank would have to fund the loan, though, i.e. it has to raise the money which it passes on to the borrower as a mortgage loan. And a common characteristic of pretty much all banks is maturity transformation: The bank’s liabilities (i.e., the bank’s own borrowings to raise the money) are of a shorter average maturity than its assets (i.e., the money it lent out to others). Because of this, the bank’s liabilities respond much more quickly and strongly to changes in the interest rate enviroment than its assets. Result: If the market rates rise, the interest which the bank needs to pay on its fundings rise, but the long-term fixed mortgage rate which the bank charges its customer doesn’t rise commensurately. Hence, the bank can actually lose money.
In which case it would lose even more to have the loan continue than for it to be paid off early.
We have one of those for times when the vet bill is higher than expected. It’s called Carecredit. We have to pay it off within 4 months, or all of the interest becomes due.
That’s true, but the purpose of the prepayment penalty is not to prevent the bank from losing money when interest rates rise (in such a case, the fixed-rate mortgage borrower would never pay off early). It’s to prevent the fixed-rate mortgage from being a one-sided bet where the customer can only win and the bank can only lose whatever happens: Without the prepayment penalty, the customer would happily keep the cheap loan when rates rise (meaning the bank loses money) and pay it off early it when rates fall (meaning the bank would not make money). With the prepayment penalty, the bank gets to pocket the penalty in the latter case, so the bet is fair again.
But again, how common are prepayment penalties even so?
We have had numerous mortgages, none of which have carried prepayment penalties.
Having a prepayment penalty as you describe it is basically the bank saying they’re going to profit no matter what happens, and screw the customers (OK, that’s not far from the truth sometimes, but…).
They’re legal (in most states), but I don’t know how common they are these days. And I wonder how it works if you prepay a little at a time, e.g. throwing an extra hundred dollars at the loan each month.
As a side note, unless your loan originates with one of the big lenders, chances are very very good that it’s been sold to FHA or something, so the lender has little incentive to charge prepayment penalties - they’ve gotten their money regardless.
Well, have you had fixed-rate mortgages, with the rate fixed over a very long time (say, ten years or more)?
No, it’s quite the reverse; a fixed-term mortgage without a prepayment penalty is a way for the customer to screw the bank no matter what happens. If rates go up, the customer merrily keeps paying the lower rate. If rates go down, he pays off early and refinances more cheaply. Remember that the customer is free not to pay off early if it’s not beneficial to him, whereas the bank has to accept the customer’s prepayment even if it doesn’t like to. It’s essentially like an option with a unilateral right of the customer to choose whether the loan continues at a pre-agreed rate or not, and the bank has to accept the customer’s decision no matter what. As is usual in cases of such options, the writer of the option expects compensation for this, and in the case of a fixed-rate mortgage this compensation takes the form of a prepayment penalty.