THIS CONTENT REFLECTS THE PHILOSOPHY OF BOYLEDOWN LENDING INC., A CONSUMER FINANCE COMPANY LICENSED BY THE VIRGINIA STATE CORPORATION COMMISSION (LICENSE number CFI-256). IT IS INTENDED AS INFORMATIONAL CONTENT AND PROMOTES OUR LENDING MODEL. AS SUCH, IT IS CONSIDERED AN ADVERTISEMENT.

AI Disclosure:
This article was developed with the assistance of artificial intelligence (AI) using OpenAI’s ChatGPT. While the ideas and editorial direction reflect the author’s perspective, portions of the research, structuring, and drafting were supported by AI-generated insights. All content was reviewed and finalized by the author.

When shopping for a personal loan, you may have heard lenders proudly advertise:
“No prepayment penalties!”

At first glance, this sounds like a great benefit — after all, who wouldn’t want the freedom to pay off their loan early without extra fees? But there’s more to the story than meets the eye. We want to help you understand what prepayment really means under the law, why personal loans generally don’t have prepayment penalties, and what lenders should say when they talk about it.

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What Is Prepayment? (And What About Overpayments?)

You might think of prepayment as paying off your entire loan early — but under federal law, the definition is broader. According to Regulation Z, which implements the Truth in Lending Act, a prepayment means paying off all or part of your loan before it’s due. This includes:

• Paying off the whole loan early, or
• Making overpayments on your monthly installment (paying more than the required minimum).

So if you send extra money this month to reduce your principal balance faster, that’s technically a prepayment.

The important part? Regulation Z requires lenders to disclose whether a prepayment penalty will be charged, regardless of whether the prepayment is partial or full.¹

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Personal Loans vs. Mortgages: Why Prepayment Penalties Are Usually Not Allowed

You may be familiar with mortgages, where some lenders do charge prepayment penalties to protect themselves against lost interest. But personal loans are different.

In most states, prepayment penalties on personal loans are either prohibited by law or strongly restricted.^{2 3}For example, in Virginia, the Virginia Consumer Finance Act explicitly prohibits prepayment penalties on consumer loans. The relevant statute reads:

“No consumer finance company shall collect or attempt to collect any prepayment penalty or charge on any consumer loan.”
— Virginia Code § 6.2-1537

This means personal loan lenders in Virginia cannot legally charge you a penalty if you decide to pay off your loan early — whether in full or by making overpayments.

Because this is the law, advertising “no prepayment penalties” on personal loans can be misleading if it doesn’t explain that it’s required by state law. It might give the impression the lender chose not to charge penalties as a special favor or because their brand is particularly consumer friendly — when in reality, they have no choice.

Is that Kind of Marketing Deceptive or Unfair?

Under consumer protection laws like UDAP (Unfair or Deceptive Acts or Practices)⁴, advertising something you’re required by law to do can be considered misleading if it implies that it’s a discretionary benefit.

Both the FTC and CFPB have made it clear in their UDAP/UDAAP guidance that even literally true statements can be deceptive if they mislead consumers. )“The Commission considers the net impression created by a representation.”; “A practice may be deceptive even if it is factually accurate, if the overall net impression it conveys is likely to mislead consumers acting reasonably under the circumstances.”) FTC — Deception Policy Statement-1983.
“Deception can occur even if no consumer has been misled yet and even if the statement is factually correct, if it is misleading or deceptive in context. CFPB — UDAAP Examination Manual

It’s Unlikely Deceptive

That said, one required element of deception claim under UDAP is that the misleading impression is material (i.e., likely to affect a consumer’s choice or conduct regarding a product or service). One would have to prove whether consumers were influenced by the ‘no prepayment penalty’ language in applying for a loan that had this ad language.

Hard case to prove.

It’s Unlikely Unfair

A neighboring claim for unfairness under UDAP would require, among other things, that the injury is not outweighed by countervailing benefits to consumers or competition. There is an argument that the countervailing benefit of consumer education (i.e. knowing that there are no prepayment penalties) outweighs the injury of not being told that prepayment penalties are prohibited by law.

Moreover, from a political standpoint, regulators often focus their limited resources on more serious harm — such as undisclosed fees, unlawful interest rates, or discriminatory lending practices.

So, will regulators crack down on lenders who do this? Probably not — unless there’s a pattern of broader deception, unfairness or abuse.

Still, That Doesn’t Necessarily Make It Ethical

Even if it’s not a big regulatory risk, marketing a legal requirement as if it’s a gift to the consumer raises ethical concerns . For similar reasons, it could lead to lawsuits from competitors under the Lanham Act, a federal law that governs false advertising. Under the Lanham Act, a competitor might argue that this kind of claim unfairly paints the lender as “better” or more consumer-friendly, even though every lender in that state is subject to the same law. Once again, success on that theory seems unlikely. A case being brought on such a claim seems even more unlikely.

Why This Matters to You

As a borrower, this isn’t just legal nuance — it’s about trust.

Do you want to do business with a lender that tells you, “Look at this generous benefit we’re offering,” when in reality, a lender had no choice but to give it to you? It’s not just about the claim — it’s about how they frame their relationship with you.

Depending on the phrasing, context and circumstances, this type of advertising could make a lender look better than they are, and makes others look worse by comparison, even though they’re all playing by the same rules.

Better Advertising Options?

If a lender insists on including the ‘no prepayment penalties’ language in their ad, they have options to be more transparent — especially in a state like Virginia where prepayment penalties are prohibited by law. It would be better, for instance, to avoid presenting legal compliance as a unique benefit and instead,

• acknowledge the legal context,
• Educate the consumer (lightly),
• Still convey friendliness and ease of repayment.

Here’s a straightforward and compliant example:

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“In Virginia, consumer loans like ours can’t include prepayment penalties — so you’ll never be charged one here.”

The Bottom Line

Lending is about more than interest rates and loan terms — it’s about values. A lender that leads with honesty and transparency respects your ability to make informed decisions. That’s the kind of relationship worth building.

Disclaimer: This blog post is for informational purposes only and is not intended to provide legal, financial, or tax advice. You should consult your own attorney, financial advisor, or tax professional regarding your individual situation and any legal obligations applicable to your business or personal finances.

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Email: doboyled@gmail.com
Phone: (631) 379‑0306
Mailing Address:
Boyledown Lending Inc.
285 Crockett Hill Lane
Cross Junction, VA 22625

1. Here’s the key portion of Reg Z and its corresponding commentary:
   
   12 CFR § 1026.18(k)(1):
   “The creditor shall disclose the consumer’s right to prepay the indebtedness without penalty. If the consumer may prepay all or part of the indebtedness without penalty, that fact shall be disclosed.”
   
   This provision expressly includes both full and partial prepayments, meaning that overpayments on an installment — paying more than the scheduled amount — qualify as partial prepayments.
   The Official Interpretation (also known as the Staff Commentary) to this section of Regulation Z further clarifies:
   
   Commentary to §1026.18(k)-1:
   “This section requires a statement of whether or not the consumer may prepay all or part of the obligation without penalty.”
   That means overpayments — which reduce the principal balance ahead of schedule — must be treated under this rule, and if there are no penalties for doing so, the disclosure must clearly state that. ↩︎
2. Most states prohibit or strictly limit prepayment penalties on personal (consumer) loans, especially those under a certain dollar threshold (like $5,000 or $10,000), or those regulated by small loan, consumer finance, or usury laws. However, a few states do allow prepayment penalties in some form if:
   The loan exceeds a certain dollar amount,
   The loan is not under a small loan act (e.g. it’s a larger unsecured loan),
   The penalty amount is limited (e.g. capped at a certain number of months’ interest),
   The borrower agrees to it in writing. ↩︎
3. Examples of States That May Allow Prepayment Penalties (in limited cases):
   California:
   Under the California Finance Lenders Law, prepayment penalties are prohibited on consumer loans under $5,000.
   Above $5,000, a limited prepayment penalty may be allowed, but only for loans with a term over 60 months and subject to strict rules.
   Texas:
   Consumer loans under Chapter 342 (regulated loans) generally do not allow prepayment penalties.
   But nonregulated lenders may structure loans outside of those rules, so the possibility exists in nonconsumer contexts.
   Illinois:
   Under the Illinois Consumer Installment Loan Act, prepayment penalties are generally prohibited, but again, loans outside of this framework (e.g. commercial loans or loans above certain thresholds) may allow them.
   Georgia:
   Prepayment penalties are allowed on consumer installment loans if disclosed properly, and depending on the type of license and loan amount. ↩︎
4. i) FTC Authority on Unfair or Deceptive Practices (UDAP)
   Under the Federal Trade Commission Act, Section 5 broadly prohibits “unfair or deceptive acts or practices in or affecting commerce”—this is the foundation of federal UDAP enforcement:
   15 U.S.C. § 45(a): Unfair methods of competition … and unfair or deceptive acts or practices … are hereby declared unlawful.
   ii). Virginia’s Deceptive Practices / UDAP Rules
   Virginia enforces its own consumer protection standards under the Virginia Consumer Protection Act:
   Va. Code § 59.1‑200(A): Contains an array of prohibited practices such as misrepresentations regarding goods, services, affiliations, or certifications.
   Va. Code § 18.2‑216: Makes knowingly publishing untrue, deceptive, or misleading advertisements a Class 1 misdemeanor.
   
   iii). CFPB Authority on Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
   Under the Dodd-Frank Act, the Consumer Financial Protection Bureau enforces rules against unfair, deceptive, or abusive acts or practices (UDAAP) in consumer financial services:
   12 U.S.C. § 5531: Grants the CFPB authority to prescribe rules identifying UDAAPs.
   12 U.S.C. § 5536: Authorizes the CFPB to take action against violators of unfair, deceptive, or abusive acts or practices. ↩︎