What is a key impact of a prepayment penalty on a borrower?

A prepayment penalty serves as a deterrent for borrowers who might consider paying off their loan before the maturity date. This type of penalty is typically implemented by lenders to ensure that they receive the expected interest income from the loan over its full term, even if the borrower chooses to pay off the loan early. By imposing a financial penalty for prepayment, it can discourage borrowers from refinancing or paying off their loans ahead of schedule, as the penalty would incur additional costs.

In contrast, options suggesting that such a penalty encourages early repayment or decreases the loan amount do not align with the objective of prepayment penalties. Additionally, limiting the applicability of prepayment penalties to government loans ignores the fact that many private loans can also include such penalties, making the relevance of the fourth option unclear. In summary, the primary purpose of a prepayment penalty is to prioritize lender interests by discouraging borrowers from settling their loans early.