Prepaying a business loan and getting debt free always seem like an attractive option, especially if your business is doing well. Depending on the loan type and lender, foreclosing can save you money in the long run. It may also provide you extra flexibility and control over your cash flow.
However, it’s not all sunshine and rainbows when it comes to prepaying your loan. Many lenders levy foreclosure charges on loan prepayment, which can be anywhere between 2%-5% of your outstanding loan amount.
Read on to find out more about foreclosure charges on business loans.
What are foreclosure charges?
A foreclosure charge, or prepayment penalty, is the extra amount that lenders charge you for closing the loan before the tenure is over.
Many lenders generally have a lock-in period between one to two years, during which you can’t foreclose the loan. If you do, you will have to pay a higher prepayment penalty.
Additional Read: How to Apply for a Business Loan in 4 Easy Steps?
How to calculate foreclosure charges?
Lenders calculate the foreclosure charge based on your remaining loan amount. The penalty charges imposed on full prepayment are usually higher than part prepayment. However, some lenders don’t charge a foreclosure fee if you’re foreclosing at most 25% of the outstanding loan amount.
In any case, calculating foreclosure charges can be a bit complicated due to the number of parameters involved. If you’re finding it challenging, you can use a foreclosure calculator.
Tata Capital has the right business loan calculator to help you out. To know the foreclosure charge on your loan, all you have to do is:
Step 1: Enter the principal loan amount
Step 2: Set the loan tenure
Step 3: Set the rate of interest
Step 4: Set the value of foreclosure charges in percentage
Step 5: Lastly, set the foreclosure duration.
Should you prepay your loan?
Foreclosing your business loan offers a ton of benefits. For starters, you’d be free of monthly instalments and can use that money for other investments.
However, it’s imperative to look at the other side of the coin as well. Foreclosing your loan usually involves settling your accounts with a lump sum amount, which can put you in a cash crunch. On top of that, you’d essentially have to pay more than what’s due because of the foreclosure charges.
Prepaying can hit your pocket in another way as well. When you pay interests on a loan, it’s fully deductible under the Income Tax Act. By paying off the loan early, you lose this tax benefit. In the worst-case scenario, your business can end up in a higher tax bracket than before.
Additional Read: Things Everyone Must Know about a Business Loan Agreement
Doing the math is the key to deciding what’s best for your business. Calculate how much you could save on interests if you prepaid the loan and subtract the foreclosure charges from it. If the result is positive, prepaying might be the way to go. If it’s not, you might want to hold off.
In any case, if you’re looking for quick business credit, head to Tata Capital. Apply for a loan today and enjoy fast disbursals, competitive business loan interest rates, and flexible EMI options.
Start your loan journey by using our business loan EMI calculator today!