Have you got a small business loan with a pre-payment penalty? Did you check if one would be applied to your term? Did you know that if your loan is under pre-payment penalty the banks are literally robbing you of your money?
I was shocked when I found out that my loans had pre-payment penalties, when I paid off my loan in full well before the scheduled date, the banks charged me a penalty. Thats right they charged me a penalty for paying off my loan early, you wanna know why?
Because they weren’t making enough money off of me. I would hate to hear about someone else trying to do the right thing and clearing their debts, when all that does is make you lose more money. So today we are going to discover why you shouldn’t worry about the pre-payment penalty.
First you must understand what is a pre-payment penalty? It is a penalty that is calculated using a formula that basically multiplies your remaining loan balance by a specified percentage that can be found in your loan documents.
Secondly you must have reason for paying of your loan, maybe at the time you got your loan interest rates were high so you want to reapply for a lower interest rate. Or perhaps you have built up more collateral and your business finances have improved.
Have you checked to see what kind of pre-payment penalty is applied to your term? Although the pre-payment penalties generally follow the same formula, its a good idea to find out the exact details of your pre-payment penalty. Some are very simple where you pay a percentage of the remaining balance, some however are more complex and can work to your advantage. If you pre-payment penalty is on a sliding scale, meaning the earlier you pay it off the more you are penalized, you have the opportunity to plan your pre-payment.
There is nothing wrong with trying to stay ahead of the curve and paying off your debts as soon as possible, but will paying off your loan be the best use of your money? Usually with personal debt that is a great idea, however in both your personal and business finance there is good debt and bad debt.
Before paying off your loan in full, maybe you could use that money to invest into your business. Perhaps you can buy inventory or new equipment or make repairs to the air conditioning unit you’ve been ignoring for months.
You must also remember that your business loan can have an effect on your taxes. If you have paid off your loan, your business will show more profits, in turn this increases your tax liabilities.
Lastly you should check if pre-payment will affect your credit score. Unlike your personal credit, paying off your loan early can actually lower your business credit. The banks are ruthless and money hungry and since they won’t be profiting off of your loan in the long term, it is possible that they would tell credit agencies that you paid your loan off in an unsatisfactory manner, lowering your score.
So should you worry about the pre-payment penalty? There is no straight answer, it depends on your business’s financial situation and your own experience with loans. However now that you have discovered the basics understanding the pre-payment penalty you are much better equipped when you take out a business loan and you won’t feel like you’re signing your soul to the devil.