Prepayment

What Does Prepayment Mean?

Prepayment refers to settling an account or paying for a service or product before its due date. In the case of insurance, it involves paying the premium before coverage begins.

This is also known as payment in advance. Many auto insurers offer a discount to policyholders who pay the full premium upfront, which is one common way to save money on car insurance.

Insuranceopedia Explains Prepayment

Prepayments can be either full (the entire amount owed is paid in advance) or partial (only a portion of the amount owed is paid). Pay-as-you-go car insurance works the opposite way: drivers are billed based on actual miles driven instead of paying a premium up front.

While generally beneficial for the borrower, there are situations where prepayment may be discouraged or even penalized, as it reduces the lender’s potential interest earnings.