What term describes the process of paying off a loan balance in advance?

The term that describes the process of paying off a loan balance in advance is prepayment. This refers to the act of paying off a loan or mortgage earlier than the scheduled due date. Prepayment can occur in full, where the remaining balance is completely paid off, or in part, which may involve making additional payments towards the principal.

Prepayment can be advantageous for borrowers as it can lead to savings on interest payments over the life of the loan, potentially allowing the borrower to become debt-free more quickly. In many cases, lenders may also include certain prepayment penalties or terms in the loan agreement, which borrowers should be aware of.

Refinancing involves obtaining a new loan to pay off the existing loan, typically to secure a better interest rate or to change the loan terms. A short sale refers to selling a property for less than the amount owed on the mortgage, often as a method of avoiding foreclosure. Modification deals with changing the terms of an existing loan agreement, often due to financial hardship. Understanding these distinctions helps clarify the specific role of prepayment in loan management.