Conditional Prepayment Rate - CPR

Since banks and other lenders frequently sell their loan pools of mortgages and student loans, it can throw off their calculations if their borrowers pay back part of their loans ahead of time. So they need to calculate what percent of the loans might be prepaid based on past history of similar loans and the future health of the economy.

This is known as the conditional prepayment rate (CPR). It’s expressed as a percentage, such as: 5% of the principal of the bank’s pool of student loans is expected to be prepaid each year. If the CPR rate is high, it means the borrowers are prepaying their loans faster. This leads to a lower rate of return when the bank goes to sell that pool of loans, even though they're lower risk. CPRs can also occur when a bond issuer pays off a bond early to its investors in order to refinance at a lower interest rate.