Final answer:
A lender agreement that prevents early payoff of a loan is known as a prepayment penalty clause. It protects the lender's interest income but can be disadvantageous for borrowers, especially if they intend to pay off their loan early. Such clauses, loan payment behavior, and prevailing interest rates influence the perceived value of a loan.
Step-by-step explanation:
An agreement with a lender that prohibits early payoff of a loan is known as a prepayment penalty clause. These clauses are typically included in the terms of a loan to discourage the borrower from paying off the debt before the agreed-upon schedule. This can be disadvantageous for the borrower, especially if they wish to refinance or pay off their debt early to save on interest costs.
In the context of a loan agreement, the inclusion of a prepayment penalty may reflect the lender's interest in ensuring a certain return on investment. It prevents the early payoff of a loan which could otherwise reduce the anticipated interest earnings of the lender. However, evaluating a loan's attractiveness is not just about prepayment penalties.
A loan's value can also diminish if the borrower has been regularly late on payments, making them seem less likely to repay the loan promptly. Moreover, in an environment where interest rates have risen, a loan made during a period of lower rates becomes less appealing to buyers. These factors contribute to the pricing of loans on secondary markets, where securitization plays a significant role.
However, securitization presents a drawback. Banks that intend to sell these loans may be less scrupulous in evaluating borrowers, leading to higher odds of issuing subprime loans. Such loans, including the infamous NINJA loans, are risky due to characteristics like minimal down-payments, inadequate income verification, and low initial payments that escalate later.
From another angle, securitization provides a benefit by allowing banks to make loans without needing substantial additional funds, since they plan to sell these loans shortly thereafter and pool them into financial securities.