But prepayment comes with prepayment charges. Let us have a detailed look at what these charges are and how they work.
What is the Prepayment Fee?Business loans last for a fixed number of years. However, if a borrower decides to repay the loan before the actual tenure, the lender is not able to earn the interest that was fixed at the time of loan approval. As a result, the lenders charge a prepayment fee on the same.
But even after paying the prepayment fee, you will still be able to save a considerable amount of money by pre-paying the loan in most cases. This is especially true if you try and pre-pay in parts or in full in the earlier years of the loan.3
How is the Prepayment Fee Calculated?The prepayment penalty is directly linked to the unpaid loan amount. So, if you have already repaid your 5-year loan for three years, the prepayment fee will be lower than what it could have been if you had only repaid the loan for two years.
Lenders generally have a lock-in period of 1-2 years within which you cannot pre-pay the loan. Only if you have repaid the loan as per the EMI structure up to the lock-in period that the prepayment facility will be available.
How Much is the Prepayment Fee?The prepayment charges in SME loans vary between lenders. If you are pre-paying the loan in full, also known as loan fore-closure, the prepayment fee will be around 4% of the outstanding principal amount, and the principal part paid in the EMIs of last 12 months.
In case of part prepayment, some lenders do not charge any fee if you are pre-paying up to 25% of the outstanding principal amount. Apart from the prepayment fee, GST will also be applicable as per the terms and conditions of the loan.
Does Prepayment Make Financial Sense?Yes, prepayment can help you save a considerable amount of money if you do it the right way. As mentioned above, try to pre-pay the loan as early in the loan tenure as possible to save most on business loan rates.
If you are planning to apply for an SME loan, talk about the prepayment charges with your lender to know more.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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