What are Foreclosure Charges on Business Loan?
If you have availed a business loan, then you may want to repay the full amount as soon as you can and be debt-free, right? Well, you can actually prepay the amount, and close the loan account before the actual tenure. Prepaying the loan is called foreclosure.
If you are thinking of foreclosing your business loan, then you must be wary of it, as it may not be a wise idea. Today, most lenders levy loan foreclosure charges, which can be anywhere between two to five percent of the outstanding amount.
What are foreclosure charges?
The foreclosure charge, which is also commonly referred to as a prepayment fee or penalty, is the additional amount that you pay the lender when you close the loan before the actual tenure. Many lenders in India have a lock-in period of one to two years, during which you cannot foreclose business loans. If you do so, then you must pay foreclosure charges.
How do lenders calculate the foreclosure charges?
Typically, lenders compute the prepayment penalty based on the outstanding loan amount. You may have to pay a higher penalty if you prepay the full loan amount than if you prepay the loan partially. However, there are some lenders that do not levy foreclosure fee if the prepayment amount is not more than 25% of the outstanding amount.
Calculating the foreclosure charges is quite a complicated process as there are many parameters involved. So, to make things easy for the borrowers, most lenders have a foreclosure calculator on their website. You can use this simple online tool to calculate the prepayment fees you may have to pay the lender if you choose to foreclose the loan.
To calculate the foreclosure charges, all you must do is follow the below steps:
Enter the principal amount in the relevant section
Enter the loan tenure
Enter the interest rate
Set the value of foreclosure charges in percentage
Enter the foreclosure duration
When you enter the above details and click the compute button, the tool will automatically do the calculations and show you the applicable foreclosure charges.
Foreclosing a business loan – is it a good idea?
Foreclosing a business loan definitely has plenty of benefits. For instance, once you pay off the loan, you need not worry about the monthly EMI payments, and you can use that amount for other purposes.
But it is pivotal that you consider the flip side of the business loan foreclosure. When you prepay the loan, you would pay a lump sum amount and close the loan account. This may lead to a cash crunch. Besides, you would have to pay more than the actual due amount because the lender may levy foreclosure charges.
Prepaying the business loan can hit your finances in other ways as well. When you pay the interest on a loan, it is considered deductible under the Income Tax Act. This means you can get a tax benefit on business loan repayment throughout the loan tenure.
So, make sure that you assess the pros and cons before making a final decision to prepay the business loan. Calculate how much you could save on the interest payment if you prepay the business loan and deduct the foreclosure charges from it. If the result is positive, then you can foreclose the loan. But, as per your calculations, if you are paying more by prepaying the loan, then continuing with the regular EMIs would make perfect sense.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.