How to Know When You Should Pay Your Loan Off Early
Very often, starting up your small business depends on acquiring a loan and going into debt in order to get yourself established. For those businessmen who find going into debt a distasteful but necessary evil, the temptation to pay your loan off early is very strong – but is it always the right choice?
When to pay your loan off early
The temptation to pay your loan off early can be very strong, but there are certain factors which can make it a good or bad choice. Here are some things to consider before you make a decision:
- Pre-payment penalties – if there is a big pre-payment penalty attached to your loan, that could far outweigh any benefits you might gain from paying off your loan early. The pre-payment penalty protects a lender who stands to lose a great deal of money on the interest which would otherwise be collectable over the full life of the loan. If the pre-payment penalty is less than the interest remaining on the full term of the loan, then it’s to your advantage to pay your loan off early
- Loan type – some business loans have most of the interest front-loaded in the first few months of payments. This means that there is no pre-payment penalty for early payoff, but it also means you don’t gain anything by paying off early – other than the fact that you are no longer in debt
- Cash flow impact – you should consider whether paying off a loan early is the best thing you can do with any available cash you have, and whether it might be put to better use as working capital
- Credit improvement – when your credit has undergone significant improvement since you took out the original loan, it might be worth your while to take out a second low-interest loan in order to pay off the original high-interest loan
- Dislike of debt – when you just can’t stand the idea of being in debt whether it makes good sense or not, it might still be worth paying off your loan to recover your peace of mind
Work with your lender
When you’ve established a good relationship with your alternative lender, it can be to your mutual advantage to discuss the possibility for you to pay your loan off early. With both parties satisfied, that good relationship remains intact, and the potential for future loans remains viable.