Pros and Cons of Early Closure of a Business Loan

These days, many borrowers are prepaying their loans as soon as they have some surplus cash in hand. The main reason? You can save money on the outgoing business loan interest rates. 

However, is early loan closure really a good choice? Should you also opt for it? Here’s a list of pros and cons of early closure of business loans to help you decide.

Pros of early closure 

• Savings on interest

There’s no denying that savings on interest are a prime reason borrowers opt for early closure of loans. Why? Because closing the loan earlier means the EMIs end sooner, and so do the business loan interest rates payable.

Now, how much you can save through early loan closure depends on two factors:

• The applicable interest rate 
• The number of EMI instalments remaining

In simple words, the higher the current interest rate, the more you can save by closing the loan early. And the same applies if the number of remaining EMIs is large. 

• Increase in CIBIL score

It is common knowledge that repaying your debts on time raises your credit score. But what about closing business finance early? Usually, closing your loan earlier reflects having a good debt repayment capacity on your end. What’s more, it helps build up your credit score too.

With a good credit score, you can get your future loan applications approved quickly. At the same time, you can also bargain with a lender for favourable terms such as lower business loan interest rates.

Cons of early closure 

• Large lump sum payments

When you have a lot of EMIs remaining, closing a loan early requires a significant amount of funds. If you don’t have excess funds at hand, you might need to dip into your emergency funds for early loan closure. In fact, some borrowers even take another loan to pay off an existing business loan early, putting themselves into further debt.

Hence, it’s crucial to plan your loan repayments, considering your monthly business expenses and savings, especially if you don’t have a surplus of cash. A business loan EMI calculator can help you do this easily. 

• Pre-payment charges

Lenders often impose prepayment penalties if you repay your loan amount earlier than the due date. These penalties are usually a percentage of your entire loan amount, making the amount pretty substantial. This means you could lose more money while paying prepayment penalties than you save on interest costs through early loan closure.

One way to avoid this is by reading the terms and conditions carefully before getting a loan, and negotiating the prepayment charges with your lender, if required.

Over to you

So, should you close your loan early? Well, it depends. 

If the savings on the business loan interest rates far outweigh the overall costs of prepayment, then you can consider it. On the other hand, if the prepayment penalties are high, you’re better off following the original loan plan.