Any time we speak with independent financial advisors or registered investment advisors that are securing financing, one of the "fine print" pieces we like to point out is in regards to prepayment penalties. The reason we mention this is because there are many questions to consider. Are there prepayment penalties? If there are, what percentage are they? Do they apply to the initial balance of the loan, or is it based upon the balance of the loan at the time of penalty? Let's get down to it and go through everything you need to know about prepayment penalties.
What is a prepayment penalty? Prepayment penalties are fees that lenders may charge if you pay all or part of your loan off early. The penalty fee can serve as an incentive to borrowers to pay back the principal over the term of the loan, which allows the lender the ability to properly forecast outstanding loan balances.
When does a prepayment penalty apply? This question will depend upon whether you are taking out SBA or conventional financing. If securing SBA financing, typically there are no prepayment penalties. For conventional financing, prepayment penalties will vary dependent upon the exact terms of your loan. Prepayment penalties are one of the areas in which Advisor Financing helps to provide financial advisors with the best rates and terms. Our partners understand that you may desire to pay off your loan early, so prepayment penalties do not apply if simply paying down the principal of your loan balance. This allows you the flexibility to monitor your cash flow and as additional balances are available, to make additional payments and pay off your loan early without a penalty.
What is the amount of the prepayment penalty? The amount of the prepayment penalty that may apply is another area in which Advisor Financing has diversified ourselves. Your exact terms may vary, but generally we have some of the lowest prepayment penalties in the industry - again, which do not apply if paying down the principal of your loan.
Does the prepayment penalty apply to the initial balance of the loan, or balance at time of penalty? Whether a prepayment penalty applies to the full balance of your loan, or the balance of your loan at the time of penalty, is another scenario that will be dependent upon your exact loan terms and conditions. This is an important distinction to make as some lenders will implement the penalty on the full balance of the loan, not the balance at the time of enforcement. Let's take an example scenario where a registered investment advisor loan for $2,000,000 has a prepayment penalty of 2% and current loan balance of $250,000. Dependent upon your loan terms and conditions, this penalty could be $40,000 if it applies to the full amount or as low as $5,000 if only applied to balance at the time of penalty. This big difference is why it is essential to consider what the exact terms of prepayment penalties are. This is another area in which Advisor Financing is able to provide independent financial advisors with the best loan terms and conditions as our prepayment penalties would only apply to the loan balance at time of penalty.
How do I know if I have a prepayment penalty, or if my penalty is standard? Our team at Advisor Financing is always willing to schedule a consultative call with financial advisors and registered investment advisors to review existing loans you might have, or to provide guidance on future potential acquisitions and the resulting loan documents. Because we work with these documents, we are experts in the field and can advise you as to what is considered standard. Contact us today and we will be happy to assist!
How can I avoid a prepayment penalty? Our first recommendation in order to avoid prepayment penalties is to make sure you are reading the fine print of your loan documents, and to work with an expert in the field. Lenders that have terms seemingly too good to be true and that close on loans in just a week or two will often include egregious prepayment penalties - we have seen as high as 10% on the entire loan balance - because they know you will be locked in to the loan, and they can make money off you either via higher interest rates or by enacting the prepayment penalty.
Is it worth refinancing my loan if I have a prepayment penalty? Depending on the terms of your prepayment penalty, it may be beneficial to pay the penalty if you have the opportunity to move to a loan structure with better terms. The first term to consider will be if you are able to move to a loan with lower interest rates, which will reduce the amount of money you pay simply in interest payments. Beyond interest rate, other reasons to consider refinancing is if you are able to ease cash flow (for example, moving to a longer amortization schedule), reduce potential reporting requirements, or simply to find a better long-term lending partnership. We frequently work with financial advisors to refinance existing loans and will work with you to understand your needs and determine if refinancing an existing loan is to be of benefit for you.
