To make an informed business loan borrowing decision, it is essential for a business to understand the fees and charges associated with the loan thoroughly. For instance, you might be able to repay the loan sooner than the actual loan tenure. This can help you save a considerable amount of money in interest payments.

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.

Click here to get in touch with us to know more about the business loans

DISCLAIMER

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.



Trending Articles

Article Links

How to Get a Business Loan

Need a Business Loan

Short Term Business Loans

Types of SME Loans

What is Penal Interest

Latest Articles

sme-finance
sme-finance

What are the Benefits of MSME Registration in India?

Read More
Posted on 26 March 2020
sme-finance
sme-finance

How to get MSME Loans in 59 Minutes?

Read More
Posted on 26 March 2020
sme-finance
sme-finance

How to Maintain a Good Credit Score for SME

Read More
Posted on 26 March 2020

Featured Articles

image abc-of-personal-money
abc-of-personal-money

Are Millennials Any Different When It Comes To Planning Financials?

Read More
Posted on 05 February 2020

Relevant Articles

image personal-finance
personal-finance

How to Consolidate Your Debt? 4 Easy Ways

Read More
Posted on 28 March 2020
image home-finance
home-finance

Why Was My Home Loan Application Rejected?

Read More
Posted on 27 March 2020
image home-finance
home-finance

List Of Documents Required For Loan Against Property

Read More
Posted on 27 March 2020