Debt is stressful even if the rates and terms of your Loan are favorable. Paying off your loan early seems more logical than bothering yourself with the monthly payments. This will minimize your monthly overheads and clean up your cash flow. However, you must read your contract first because your terms might include a prepayment penalty. A prepayment penalty is a fee you are required to pay if you decide to pay back your debts in advance. As the borrower, you will be fined if your terms include a prepayment clause and your pay your loans earlier. The clause includes the amount you have to pay, it is usually a portion of the remaining balance. The prepayment fee exists to ensure that lenders get earnings from the borrowed amount. It means paying off your loan early will not necessarily mean you avoid paying the interest rate. Can I avoid paying off interest if my loan has no prepayment clause? It is more advantageous for funders if loans are not paid early because they earn off interest rates. Paying off your loan early is a loss for the funder. Prepayment fees compensate for the amount the funder will lose in interest. Not all small business loans contain a prepayment clause but early loan payments do not guarantee savings. This is because business loans are structured to save or cost you more during early payments. Some loans like amortized loans allow early prepayments without the penalties, other loans do not. What are some things to consider when paying off a loan? Whether you want to be rid of the monthly bill, free up space for refinancing or save money on interests, you must carefully think about paying your loans early. Here are some things that you should consider when prepaying your loan: Your amortization schedule. The only way you can save on interest in prepaying your loans is if it is amortized. Know your amortization schedule. Through this, you can verify at which period, in the duration of your loan, your lender stacked the principal vs the interest of your loan. Prepaying your loan may not save you that much in interest as you thought. How will prepaying the debt benefit you? Why do you need to prepay your loan? One acceptable reason for prepaying your loan would be to clear space for refinancing. But, if you want to pay your loan because the weekly or monthly payments are bothering you, bear in mind that prepaying your loan would need a large amount of money and might do more damage to your cash flow. Weigh your options, it might not be the best way to use your money. Will it affect my taxes? The interest on your loan can be deducted from your tax returns. Interest from any type of business loan can be deducted from taxes. Paying off your loan early would actually   What type of loans has prepayment clauses? Most of the time, loans do not have prepayment clauses but they also do not incentivize early payments. If you have any of the following loans, it is advised not to pay them early. SBA Loans - SBA loans are often amortized but they also have prepayment clauses which make them unique. The prepayment terms for SBA Loans are usually standardized. For SBA (7a) they are: No prepayment clauses are included in loans with 15-year terms. If it is more than 15 years, the first three years will be covered by prepayment clauses. Other SBA Loans also have prepayment clauses. If you get this loan and decide to pay it early make sure to check the prepayment clauses. The rates are usually low because of their nature as government-backed loans. Short-term loans - Since short-terms cover only a year they do not usually include prepayment clauses. To make sure lenders could gain from the loan, they forego the usual annual percentage rate or interest rate and use a factor rate instead. Borrowers would need to pay the exact amount of money regardless of whether they pay the loan early or not. Cash Advances - The same with short-term loans, MCA’s use factor rates to compute for the total amount owed. Paying your advance early will not save you any money on interest. It is best not to pay it unless you need to clear it for refinancing. Repaying your loans earlier may or may not be good for your business. Check with your finance officer if the best move is to pay your loan early. You can also choose to apply for a loan at WeCompete Lenders. Our underwriters explain the prepayment clauses to you before your sign for approval.  Call us at +1 (844) 516-0633 or email us at [email protected].