Also known as call protection, a make-whole or a prepayment penalty. A penalty assessed against a borrower who elects to pay off a debt before its maturity date. This amount can potentially be quite significant.

In bank loan financings, certain loan agreements require that a prepayment premium (or call premium) must be paid by the borrower to prepay all or part of the loans. This fee can be payable on all prepayments or only on prepayments made as part of a refinancing of the loans. Prepayment penalties are more common on refinancings of loans held by term B lenders but can be based on refinancings of the entire loan facility. Penalties are usually imposed on loans that are refinanced within the first three years (or less) of the closing date and the penalty typically decreases in each successive year. For example, a typical call premium may equal 3% of the loan amount if the loan is repaid in the first year after closing, 2% if repaid in the second year, 1% if repaid in the third year, and 0% after the fourth year.

For more information, see Practice Note, Loan Agreement: Prepayment and Commitment Reduction Provisions and Standard Clauses, Loan Agreement: Prepayment and Commitment Reduction Provisions.