Will paying off your business loan early save you money or cost you more? Find out in our guide.
One of the most notorious features of personal and business loans is an early repayment, or prepayment, fee. This is when you are charged a fee if you decide to pay back your whole loan earlier than agreed.
Repaying ahead of schedule can save you money on interest and gets you out of debt sooner, but it also means less money for the lender than they expected. To compensate, some lenders impose strict early repayment fees if you pay back more than you need to, and discharge fees when you finish paying back the loan and your account is closed earlier than expected.
If there’s a chance you might pay back your loan sooner than is stipulated in its terms and conditions, you may want to check to make sure there are no prepayment or discharge fees involved.
Can you repay your business loan early without penalty?
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Is early repayment worth the fees?
Generally speaking, if your lender has no prepayment fees and no discharge fees then you can save money by paying the entire business loan back sooner. If your lender does have early repayment or discharge fees then it might still be possible to save money with early repayments, or it could end up costing you even more.
Here’s how to work out what to do:
- Determine how much you could save with early repayment. Add up the total amount you will spend on interest over the rest of the loan period and factor in any ongoing fees. This is the total amount you might save if you were to repay it all today.
- Subtract any prepayment or early discharge fees from the amount you can save. Pay close attention to the type of fee it is (percentage, flat sum, etc) and do not assume that all lenders have similar costs. Early repayment fees can range from nonexistent to exorbitant, so they are worth paying close attention to.
- The amount you are left with is the value you will save if you pay off your loan early. If the figure is negative, it means that repaying your loan early will actually cost you more than it will save you.
How to maximise your chances of saving money:
- If you want the option of repaying a loan early, it can be worth looking for a lender that doesn’t charge prepayment fees. Don’t forget to compare the benefits and interest rates too. Sometimes you might want to go with a lender, even if they have prepayment fees, because of the other benefits they offer.
- Use an online calculator to see how certain repayment options can help you save more money, while others can cost you more. Ideally your chosen repayment plan will be perfect, but choosing a provider without early repayment or discharge fees is a good way of planning for the best.
Weigh up the pros and cons of repaying your loan early
It might seem like a good idea to pay back your business loan early, but even if there are no prepayment or discharge fees it might not be in your best interests.
- Save money by paying less interest
- Your business credit score will improve if you are debt-free
- It will free up money to reinvest in your business
- You may be able to get a new loan with better rates and terms elsewhere
- You can avoid ongoing fees
- Interest paid on business loans is tax deductible and you will lose this tax deduction. If this affects your tax bracket then it might cost you more than it saves you.
- You need to be sure that repaying early is the best choice for your business and your finances. The last thing you want to do is repay a loan early only to have to take out a new one because business is slow and you have no cash reserves.
- Early repayment and discharge fees may apply, and can be substantial. In some cases this could be a set percentage of the remaining balance, which can make big early repayments entirely unsuitable.
Early repayment isn’t always the right option, and providers without prepayment fees are not always an ideal choice. However, it is an important factor to consider when comparing business loans. Even if you choose not to use it, simply having the option of paying a loan back early without worrying about hidden costs is always good for peace of mind.