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Early closure of Business Loan: Pros and Cons

By Finserv MARKETS - Mar 7,2019
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Early closure of Business Loan: Pros and Cons

Business loans for small and medium enterprises have become a norm these days. Majority of the financial providers offer business loans these days at varied terms of interest and tenure. Many business organizations choose to repay their loan before the due date when they have a sudden flow of cash. The businesses can choose to make a part payment or full payment before the completion of the loan tenure. The process of paying off the loan before the tenure ends is known as ’early closure’ or sometimes ‘pre-closure’. This is mainly done to save interest costs.

Pros of early closure of a business loan

1. Savings on business loan interest rate

The business loans attract a good rate of interest throughout the tenure. The payment of the loan before the completion of the tenure is mainly done to save the interest costs, which would have otherwise gone to the lender. Saving interest costs means a considerable amount of savings for the business. This amount can be employed in other areas of the business. However, the borrower should be well aware of the interest and principal component of the loan. If most of the interest component has been paid off, the borrower would not gain much by early closure of the loan.

Cons of early closure of a business loan

Along with the advantage of savings on the interest rate, an early business loan closure has a couple of drawbacks as listed below.

1. Prepayment penalty

While the borrower may feel that paying off the loan will lead to savings of interest expenses, it may be otherwise. The lender earns by way of the interest, so it is a loss for him if the loan is prepaid. Therefore, in order to demotivate the borrower from prepaying the loan amount, the lender may impose high prepayment charges or penalties. As a result, this penalty eats away any benefit that the borrower may have got by early closure of the loan. Hence, it is very important that the borrower must read the terms and conditions of the business loan very carefully and negotiate the prepayment charges before the commencement of the loan term.

2.Pressure on cash flow

While most businesses will prepay the loan when they have surplus cash, some may also choose to prepay the loan for the peace of their mind. However, it is not a very good idea financially. The borrower needs to have the calculations in place and ensure that he does not end up taking another loan in attempting to do an early closure of business loan. If the calculations justify that the financial position of the business would remain intact even after early closure of the loan, the borrower should opt to pay off the loan before the tenure ends.

Process of Business Loan Pre Closure

Step 1: Visit the lending institution from where you have availed the business loan. You must request a pre-closure form and input all the required details carefully.

Step 2: You will have to submit a set of documents for pre-closing your business loan. The documents required are mentioned below:

  • Identity proof such as Passport, Driving License, or Aadhaar card

  • Loan documents

  • Bank statement of the payment and clearance of the last monthly installment

  • Pre-payment statement that can be availed by requesting the lender

Step 3: After submitting all the required documents, you can prepay the outstanding loan amount through demand draft, cheque, or cash. You would also have to bear the prepayment charges levied by the lender. Financial institutions usually charge a percentage of the principal amount as prepayment penalty.

Step 4: Once you have paid the entire loan amount, the lender will provide you an acknowledgment letter that you must keep safely for future reference.

Step 5: The final closure of the business loan agreement will be sent to you after a few days of closure of the business loan.

There are several benefits of pre closing a business loan. The sooner you prepay your business loan, the more you will be able to save on overall interest payout. This can lower the total cost of borrowing in the long run. However, before you decide to pre close your business loan, it is advisable to calculate the prepayment amount by using an online calculator. This will help you make a better decision.

Conclusion: Make an informed choice

However, the early closure of business loans may not be the best choice in every scenario. Similarly, searching for a lender who does not charge a prepayment fee is not the right thing always. You need to consider various factors. You must check the pros and cons of business loans offered by various lenders and then and finalize an option. You can use online business loan calculator available to do the cost-benefit analysis of the early closure of business loans.

Your aim should be to choose a loan, which may give you reasonable benefits of early closure of business loans but should not include latent charges or penalties in case the loan is prepaid.

Applying for a Bajaj Finserv business loan with Finserv MARKETS is easy, convenient and completely hassle-free. What’s more? The entire process is online and completely transparent. So why wait? Avail a business loan with us and get your business on the growth trajectory, today!

You should also read about what is SME Loan.

“Finserv MARKETS, from the house of Bajaj Finserv is an exclusive online supermarket for all your personal and financial needs. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!”

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522