What does prepayment of a loan refer to?

Prepayment of a loan specifically refers to the act of paying off the entire remaining balance of the loan prior to its scheduled maturity date. This can include making a significant additional payment or paying off the mortgage completely. By doing so, the borrower can potentially save on interest costs, as interest is typically calculated on the outstanding balance for the duration of the loan.

The other choices represent different financial actions that do not align with the definition of prepayment. Making regular monthly payments simply involves fulfilling the agreed-upon payment schedule, which is distinct from prepayment since it does not involve paying off the loan early. Refinancing the mortgage entails replacing an existing loan with a new one, which may have different terms but does not emphasize paying off the loan early in the same manner. Defaulting on the loan, on the other hand, means failing to meet the repayment obligations and is a negative situation for the borrower, contrasting with the proactive nature of prepayment.