Being in Debt puts pressure on you and your finances. It is exhausting to even think about ways on how to come up with enough funds to cancel out the Loan you took and the interest it accumulated. Even if you bagged yourself a good deal with admirable terms, the thought of the debt still sits at the back of your mind, just waiting to be addressed. So when you come across a sizable amount of money you could use, shouldn’t you pay off what you borrowed as soon as you can to get rid of that nagging feeling of being in debt? No, that’s not always the right choice.   The Pros of Early Payment Let’s first focus on the good side of eliminating debt. Eliminating debt eases your worries about a lot of financial obligations. One of the worst things about being in debt is the anxiety and the doubt that constantly plagues the borrower. Knowing that you have a responsibility to keep a steady flow of payment going makes you wary of possible interruptions due to unpredictable situations. Being debt-free gives you the security that you won’t have to stress over paying back loans and interests should you find yourself in a financial mess. Freeing yourself early from a loan also frees up your cash flow. It gives you more control over your money and spending. It allows you to explore possible prospects without worrying if you could afford it on top of an unpaid debt. You can pour money into another investment, buy proper equipment and hire good people for a business, and secure new properties. It also makes you look attractive to potential lenders should you decide to borrow money again. Debtors want to make sure that you don’t have other debts to struggle with while paying back what they lent you. It assures them that not only can you pay them back in full, you can also pay them promptly, leaving both parties available to pursue different opportunities as soon as it is done. Mainly, it relieves you of the stress and anxiety of handing over your hard-earned money to the lender and spares you from the further accumulation of interest payments.   The Cons of Early Payment Most of the time, getting things done earlier than expected is a commendable thing. But ridiculous as it may sound, it’s not always the case. We were taught to think that being in debt is bad so it’s better to do away with it as soon as you can but no, it doesn’t always work like that in business. Not when you have a prepayment clause in that loan agreement you signed on. That’s right. You read it correctly. You can get punished for paying off your debts sooner than later. But how can you end up paying more for being done with your debt in less time than expected? A prepayment penalty (also called a “prepay”) is an agreement between borrower and lender on when loans are supposed to be completely paid off. The time and amount of payment are regulated so that the borrower should only be free of the loan after a particular time frame. If fully paid earlier than scheduled, the prepayment penalty comes into action. In simpler words, it is a fee that is charged to the borrower if they entirely paid their debts too early. Lenders earn money from the interest accumulated from a debt. Paying them back too early robs them of their projected profit so, to get that revenue, they will demand a certain amount of money.   What kinds of loans usually have prepayment clauses? SBA Loans – For example, when you get an SBA(a) loan, if the term is under 15 years, there are no prepayment penalties. For loans fifteen years or more, a prepayment penalty goes into action if you pay off your debt in the first three years. You have to pay a fee for three consecutive years: 5% if you pay back during the first year, 3% if within the second year, and 1% if within the third year. Short-Term Loans – Short-term loans usually have factor rates so a fixed amount of profit should be paid back to the lenders. Even if you pay them back earlier than what you agreed on, you won’t save any money. Merchant Cash Advances – Just like with short-term loans, merchant cash advances determine what you should pay back by with factor rates. So no savings here either, regardless of early payment   Should You? Or Shouldn’t You? In conclusion, all you need to remember is to read the fine print of your contract carefully and make sure you know what you’re agreeing to. Calculate what you can get from eliminating a loan against what benefits you can enjoy by keeping the loan. Pay off that debt at a pace that will benefit you best. WeCompete Lenders has working capital solutions with and without prepayment options. Know more about your choices by calling us at +1 (844) 516-0633 or [email protected].