Q:
I've been approved for a loan to refinance my company's
building. I called my lender for a final loan balance, and he
reminded me that my loan had a prepayment penalty. After
considering the rollover of the prepayment penalty into the new
loan, the difference in terms and monthly payment was too close to
bother refinancing. Can I do anything to have the prepayment
forgiven or reduced?
A:
It's likely too late in the game to negotiate. Forgiveness
isn't a word I associate with banking, especially where
prepayment penalties are concerned. By definition, a prepayment
penalty is a fee a borrower agrees to pay if he or she pays the
loan balance prior to its maturity date. It exists to protect the
lender's profit margin.
There isn't any industry standard for prepayment penalties,
but they usually run 3 percent of the loan's out-standing
principal balance the first year on the books, 2 percent the second
year and 1 percent the third year.
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Historically, lenders have held grudges against borrowers
wishing to pay their loans off early-and with good reason. A
lending institution negotiates profitable terms on blocks of money
they borrow and then extend to you. They know before they lend you
the money the term extension that will maximize their profit, and a
prepayment penalty ensures this profit isn't diminished if you
interrupt that term by paying the loan off early.
Still, you don't get if you don't ask, so I suggest
approaching your lender about forgetting the penalty anyway-just
don't be surprised if the answer is no. A few of my
clients' prepayment penalties have been waived, but it was
mostly because they were financially strong as well as refinancing
with the same institution, and the bank wanted to keep them happy
to retain their business.
You've learned an expensive but valuable lesson in the world
of business finance. To avoid another surprise like this down the
road, be sure to tell your lender not to bring a prepayment penalty
to the closing table.
Doug Hood is co-founder of Rainmaker Capital Corp., a capital
acquisition consulting company in Cartersville, Georgia. Co-founder
Marilea S. Hood contributed to this article. Send questions or
anecdotes via e-mail to doughood@rainmakercapital.com.
Originally published in the March 2001 issue of Entrepreneur Magazine