Wondering why your creditors will charge you a fee if you pay off your business loans early? Here’s an explanation of early loan repayments and whether it makes sense to pay off your loans before the loan term ends.
Prepayment penalty refers to the agreement in the terms and conditions of the loan that the lender would assess a penalty when the business loan is prepaid within a certain time frame.
Some borrowers pay their loans before maturity for various reasons like consolidating debts, increase of cash flow, and so on. Maturity on business loans is often done on one to five-year terms and if you break the loan before the term you are likely to accrue prepayment fees.
Some lenders do not allow prepayment while others would penalize borrowers for early payoff. The main reason behind this is to mitigate their loss and the risk they incurred in approving your loan.
Creditors may charge a fee based on the current interest rates on your remaining balance or the interest rate differential. Other banks may charge-discharge fees and other additional costs. So, if you intend to break your business loan before the term, it is important to talk to your loan officer about the possible fees that you have to pay for and decide if an early payoff would benefit you or not.
Should I pay off my loans early or keep the money?
In this high interest-rate environment, prepayment of loans is a good way to save money and avoid accumulating interests. Carrying high interest rate and paying high debts every month, may took a toll on your financial health. This is true to those without adequate cash flow to pay on time and a financial buffer to cover for interest on late payment. But, prepayment is not always a wise idea. So, here are things to do before prepaying off your loans:
- Do the math and compare the benefits of paying off your debt or keeping the money. You can keep the loan if you are earning more money on interests on investments, or tax deductions. By investing the money instead of paying off a debt, you can make compound interest, but you have to find a way to manage your debt without undermining your credit score.
- Triage your debts and pay for your bad debts first. Getting stuck with a bad debt means paying double expenses, not only for your original debt but for the high interests that do not benefit you at all.
- Look into your money on hand. If you have no other money of any kind than the one that you want to pay off for your existing loan, then invest it wisely.
ALC Commercial offers flexible repayment loans and low-interest rate options so you don’t have to worry about being penalized for early payoff. Whatever your financial situation is, we can help you finance your business needs and stay competitive in our fast-growing economy.
Contact us today!