Business Guide to Prepayment Penalties (& How to Avoid Them)

December 4, 2021
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A prepayment penalty on a loan can be a huge drag for borrowers. Usually starting around 2% of the principle, prepayment penalties are often unwanted obstacles borrowers face. If a borrower wants to pay off a loan early and reduce their debt, they can be slammed with a prepayment penalty for many loan types. 

So what is a prepayment penalty and why do lenders enforce it? We are going to walk you through the definition of a prepayment penalty, explain why many lenders have one in place, and provide solutions to how to avoid paying one. 

What Is a Prepayment Penalty?

A prepayment penalty is a fee that lenders charge borrowers for paying off their loan several years after taking out the loan. Depending on the lender, the prepayment penalty fee will be dismissed after the loan has been in repayment for three to five years. 

Most times, borrowers aren’t able to repay a loan within only a year or two of taking it out. But, many people choose to refinance their loans if their credit improves or they find a lower interest rate. Prepayment penalties make it more difficult for borrowers to refinance loans.

Before accepting a loan offer, always read the loan documents and fine print. Prepayment penalties are legally included in detail on loan documents.

Example Prepayment Penalty Loan Schedule

Here as an example table showing what a loan prepayment penalty might look like over the life of the loan.

As you can see in this example, if the loan is paid back in full only one year after being taken out, the borrower would be charged a 2% fee. As years of repayment pass, the prepayment penalty reduces slightly each year until it is completely gone. 

Year of Loan Prepayment Penalty (percent of outstanding loan balance)
1 2%
2 1.5%
3 1%
4 0.5%
5 0%

 

Disclaimer: This prepayment penalty loan schedule is purely an example and does not reflect the prepayment penalty of all loans. Speak with a loan professional and read the loan offer to learn more about a specific loan’s prepayment penalty.

What Does a No Prepayment Penalty Mean?

No prepayment penalty means that borrowers can partially or fully repay the loan at any time without a fee. Finding a loan with a no prepayment penalty policy is important, especially for business owners who want to eliminate debt as soon as possible. 

LendThrive, a member of the AVANA Family of Companies, offers business owners fixed rate business loans with no prepayment penalties. That’s right! LendThrive has no prepayment penalties.

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Read on to learn more about why lenders have prepayment penalties and how to avoid them. 

Why Do Lenders Enforce Prepayment Penalty Fees?

The big question is, “Why do lenders enforce prepayment penalty fees in the first place?” Well, lenders disincentivize borrowers from paying off a loan early and prevents the lender from losing its interest income. 

With prepayment penalty fees in place, borrowers cannot just refinance their loans as soon as they find a better rate. Prepayment penalties discourage borrowers from paying back their loan early or refinancing.

SBA Prepayment Penalty

Is there an SBA prepayment penalty? Yes, SBA loans have prepayment penalty fees for loans with a maturity of 15 years or longer.

According to the SBA loan terms and conditions, the prepayment penalty applies when:

  • Borrowers voluntarily prepay over 25% of the outstanding loan balance. 
  • The prepayment is made within the first three years of the loan.

 The SBA charges a prepayment penalty:

  • First year after disbursement – 5% of the amount of prepayment.
  • Second year after disbursement – 3% of the prepayment amount.
  • Third year after disbursement – 1% of the amount of the prepayment.

If you find that an SBA loan isn’t right for you or your SBA loan application gets denied, LendThrive is ready to help your business succeed. Apply for a loan with no prepayment penalty from us today!

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How To Avoid a Prepayment Penalty

What are some ways to avoid paying a prepayment penalty? Here are several options for steps you can take to avoid paying a fee. Note that these are not guaranteed to eliminate prepayment penalties from all loans. 

Avoid Frequent Refinancing

You will want to avoid refinancing frequently because refinancing signals to your lender that you will likely try to refinance as soon as you find a better rate. If you avoid this, lenders will look at you as less of a risk.  

Offer a Higher Down Payment & Negotiate

Another way to avoid prepayment penalties is to offer a higher down payment and negotiate to eliminate the prepayment penalty. Sometimes having a co-signer or a higher down payment is enough to negotiate better terms.

Wait Until Prepayment Penalties Phase Out

As we mentioned earlier, oftentimes, prepayment penalties will phase out after several years from disbursement. Simply waiting to repay in full until this time has come will save you from paying a prepayment penalty fee.

Choose a Lender That Doesn’t Charge a Prepayment Penalty

If you are just now searching for the right loan for your business, consider choosing a lender like LendThrive that has no prepayment penalties. This is the easiest way to avoid these fees. Read on to learn more about LendThrive. 

Prepayment penalty fees are not a necessary part of a loan. So take advantage of finding a lender that doesn’t charge them. Hopefully, you have a better understanding of these fees and why many lenders enforce them. To avoid a prepayment penalty, choose LendThrive for your next loan.

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Get a Loan from LendThrive and Pay Back Anytime

Luckily, the team at LendThrive does not believe in charging prepayment penalties. We want your small business to succeed. If you are growing your business quicker than expected and want to pay off your loan early, you are free to do so.

We offer fixed rate business loans up to $150K and even have a rewards program. Our Rate Reduction Rewards program lowers your interest rate slowly for making consistent on-time payments. So your interest rate will decrease over the life of your loan. 

Expand your business with a loan from LendThrive. We are here to support you during this exciting stage and it is our goal to help you succeed.

You can use our loan calculator to see what you may qualify for before applying. Apply today or contact us for more information. 

Frequently Asked Questions

Why does LendThrive have no prepayment penalty?

LendThrive doesn’t have a prepayment penalty because our team wants to see your business succeed. If your business is thriving and you want to pay off your loan early, congratulations!

How long do I have to be in business to qualify for a loan from LendThrive?

To qualify for a fixed rate business loan from LendThrive you need to have been in business for at least one year. 

Is there a minimum credit score requirement?

Yes, to qualify for a loan, you must have a minimum credit score of 675.

How long does it take to get approved for a loan from LendThrive? 

You can get approved for a loan in as little as 24 to 48 hours from LendThrive. We pride ourselves on our quick turnarounds.

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