Foreclosure Charges On Business Loan 

Foreclosing your business loan requires you to pay a lump sum amount. Read on to know everything about foreclosure charges, process of foreclosure for business loan.

7 Oct,2022 17:27 IST 5 views
Foreclosure Charges On Business Loan 

A strong financial footing in business not only helps to sustain operations but also take the venture to the next level. For this every business requires a steady flow of funds. While some choose to invest their personal savings to fund their business requirements, many opt for business loans from a bank or a non-banking finance company (NBFC).

Loans, irrespective of its type, are liabilities and it is the responsibility of the borrower to repay the loan amount through timely installments. Usually, business loans are offered for a fixed number of years. The repayments of business loans usually start immediately, though it may differ depending on the lender and the loan structure.

Sometimes, it may happen that the borrowers manage to arrange a lump sum amount equating to the outstanding loan amount before the end of the loan tenor. This could be because of extra profits, additional orders, higher margins, or other reasons. They can then choose to repay the entire loan amount at one go before the due date.

Prepayment helps borrowers to be financially debt-free and saves them from regular EMIs. It also helps the borrowers to save a considerable amount of money in interest payments.

On the other hand, it deprives the lender of the interest that was fixed at the time of loan approval. To compensate the loss, lenders charge a prepayment fee or foreclosure charges on the outstanding amount.

Foreclosure Charges

Most lenders have a lock-in period of one-two years within which no borrower can pre-pay the loan. Foreclosure charges vary from lender to lender. The charges can go up to 7% of the total outstanding amount.

In case of partial prepayment, some lenders do not charge any fee if the amount to be pre-paid is 25% of the outstanding principal amount. GST charges are also applicable as per the terms and conditions of the loan.

Calculating The Foreclosure Charges

The foreclosure charges depend on the unpaid loan amount and the pending loan tenor. So, for example, if the original loan tenor is 10 years and the borrower chooses to clear-off the debt in the fifth year, the foreclosure charges will be higher than what it would have been had it been paid in the sixth year.

Most lenders provide online foreclosure calculators to calculate the foreclosure charges. To calculate the charges, the borrower needs to fill in the total loan amount, tenor, rate of interest, total number of EMIs already paid, and the foreclosure month when the borrower chooses to clear the entire balance loan amount.

Process Of Foreclosure

To avail this facility the borrower has to submit an application to the lender. The lender will then inform the foreclosure charges and the penalty amount, if any. The borrower can pay the total amount through cheque or demand draft or through online banking.

Conclusion

Prepayment and foreclosure of business loans before the due date offer multiple benefits. It can improve the credit score and help to fetch lower interest rates on future loans.

Foreclosure of a loan can be done anytime during the loan tenor. While planning for a foreclosure it is important to calculate the overall costs that will be incurred due to the early repayment of the loan.

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