What is an Exit Fee?

Sometimes known as withdrawal fees, exit fees are fees that are paid when a customer chooses to terminate a working agreement with a vendor before the end of a contract. Fees of this type help to offset the loss to the vendor. An exit fee is applied in many different scenarios, such as paying off a loan early, leaving a utility system, or selling shares of stock in a managed investment scheme.

A lender is likely to charge an exit fee when a borrower chooses to pay off a loan earlier than the originally proposed payoff date. Depending on the terms of the loan agreement, the amount paid by the borrower may be significantly less than the original amount anticipated, since the interest that would be applied over the duration of the loan would not be generated. In order to partially offset this loss of income to the lender, an exit fee is assessed. The fee still tends to be much less than the interest that would have been assessed if the borrower had not chosen to pay off the loan early, which still makes the idea of retiring the debt early attractive to the borrower.

Many utility companies also charge an exit fee. This is particularly true in nations where several companies supply the same type of utilities within a given geographical area. The fee is usually applied to the last bill issued on the account, and serves to partially offset the loss incurred by the supplier as the result of the lost business.

While not always referred to as an exit fee, it is not unusual for communications companies that provide cellular phone services to charge some sort of penalty or assessment fees when a subscriber chooses to terminate the service before the end of the current contract. Often, this exit fee is waived if the subscriber is upgrading to some other type of cellular or wireless service offered by the same provider. Depending on the terms of the agreement, the fee may be calculated as a percentage of the total monthly payments remaining on the contract, or equal the amount of those payments in full.

The concept of an exit fee is also present with investment strategies. In this scenario, a fund manager who determined that it is in the best interests of the investment fund to sell a certain number of shares or units may find that an exit fee is assessed as part of the transaction. Often, the fee is a fixed percentage of the total amount invested, and that amount is deducted from the investment account once the sale has taken place.