Beware The Ball And Chain . . . of a loan: avoiding prepayment penalties.
By Doug Hood
Opinions expressed by BIZ Experiences contributors are their own.
Q:I've been approved for a loan to refinance my company'sbuilding. I called my lender for a final loan balance, and hereminded me that my loan had a prepayment penalty. Afterconsidering the rollover of the prepayment penalty into the newloan, the difference in terms and monthly payment was too close tobother refinancing. Can I do anything to have the prepaymentforgiven or reduced?
A:It's likely too late in the game to negotiate. Forgivenessisn't a word I associate with banking, especially whereprepayment penalties are concerned. By definition, a prepaymentpenalty is a fee a borrower agrees to pay if he or she pays theloan balance prior to its maturity date. It exists to protect thelender's profit margin.
There isn't any industry standard for prepayment penalties,but they usually run 3 percent of the loan's out-standingprincipal balance the first year on the books, 2 percent the secondyear and 1 percent the third year.
Historically, lenders have held grudges against borrowerswishing to pay their loans off early-and with good reason. Alending institution negotiates profitable terms on blocks of moneythey borrow and then extend to you. They know before they lend youthe money the term extension that will maximize their profit, and aprepayment penalty ensures this profit isn't diminished if youinterrupt that term by paying the loan off early.
Still, you don't get if you don't ask, so I suggestapproaching your lender about forgetting the penalty anyway-justdon't be surprised if the answer is no. A few of myclients' prepayment penalties have been waived, but it wasmostly because they were financially strong as well as refinancingwith the same institution, and the bank wanted to keep them happyto retain their business.
You've learned an expensive but valuable lesson in the worldof business finance. To avoid another surprise like this down theroad, be sure to tell your lender not to bring a prepayment penaltyto the closing table.
Doug Hood is co-founder of Rainmaker Capital Corp., a capitalacquisition consulting company in Cartersville, Georgia. Co-founderMarilea S. Hood contributed to this article. Send questions oranecdotes via e-mail to doughood@rainmakercapital.com.
