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What Are Foreclosure Charges on Business Loans?

Published on Sept 25, 2024Updated on Feb 7, 2025

What Are Foreclosure Charges on Business Loans?

Business loans are an excellent option to secure funding for establishing a business, sustaining the operations, or even funding the expansion. However, if your business is doing well and you have surplus funds available, you might consider repaying the entire loan amount early, known as foreclosing the loan.

When you do so, the lender may levy a business loan foreclosure charge. This fee is the cost associated with paying off the loan before the agreed-upon term.

While early repayment can have its advantages, it’s crucial to understand the implications of foreclosure charges to make informed financial decisions.

What Are Foreclosure Charges?

When you repay a loan before the loan tenure has ended, the lender may impose an additional fee known as a foreclosure charge. It is also commonly referred to as a loan prepayment penalty.

This early repayment fee can be a percentage of the outstanding principal loan amount or a previously agreed-upon flat fee. You can typically find the charges for a loan’s early closure mentioned in the terms and conditions of your loan agreement.

Why Is Foreclosure of Loan Required?

Loan tenure is decided at the time of application and loan agreement, but if you have surplus funds, there are benefits to prepayment of a loan. Some of these benefits are outlined below:

  • Saves interest - Foreclosing a loan can help you save a considerable amount of money on interest.
  • Improved CIBIL score - Early repayment of your business loan can positively impact your CIBIL score and enhance creditworthiness.
  • No EMI payments - You can save on the monthly EMI payments and use the funds for other purposes such as operating expenses, marketing expenses, expansion etc.
  • Reduces debt-to-income ratio - Paying off a loan early reduces your debt-to-income ratio, which can improve your financial standing.
  • Improved cash flow - By foreclosing a loan and eliminating regular loan payments, you can improve your company’s cash flow and invest in growth opportunities.
  • Financial freedom - Foreclosing a loan relieves you from future loan obligations and monthly payments, offering greater financial freedom.

How to Calculate Foreclosure Charges?

Foreclosure costs for business loans are generally calculated based on the loan amount you have already paid in adherence to the previously agreed-upon repayment structure. These charges vary for each lender but are generally in the range of 0%-7% of the principal amount.

Some lending institutions provide a calculator for the foreclosure fees on business loans for a quick and easy process. The general steps to use such tools are as follows:

  1. Enter the principal amount for the loan.
  2. Select the tenure and the rate of interest.
  3. Select the foreclosure value in percentage along with the duration of the foreclosure.

Alternatively, you can reach out to your specific lending institution to get an accurate estimate of the loan settlement charges according to their policies.

Foreclosure Charges for Different Business Loans

It is essential to understand the business loan prepayment fees so you can make an informed decision and plan out your financial situation. These charges vary from lender to lender. Let us take a look at the business loan foreclosure charges for SMFG India Credit. The prepayment charges for business loans are based on the amount of EMIs that have been already paid according to the repayment structure:

  • If 0 to 17 EMIs have been fully paid up, the foreclosure charges are 7% of the principal outstanding.
  • If 18 to 23 EMIs have been fully paid up, the foreclosure charges are 5% of the principal outstanding.
  • If 24 to 35 EMIs have been fully paid up, the foreclosure charges are 3% of the principal outstanding.
  • If 36 or more EMIs have been fully paid up, no foreclosure charges are applicable.

*Please note that all foreclosure terms and charges will be applicable as per SMFG India Credit’s policy at the time of foreclosure. If you have any queries regarding the business loan closure charges, please contact our customer support for further assistance.

Conclusion

Foreclosing a loan can provide a sense of financial relief and freedom from future loan obligations. While the act of prepaying a loan has its benefits, it is important to be aware of the effect of foreclosure on your financial plans and the business loan termination fees or foreclosure charges.

If you’re considering business loan options to support your operations or expansion, SMFG India Credit is here to assist. Eligible applicants can avail of business loans of up to INR 75 lakhs* at competitive interest rates. Our flexible loan tenures go up to 48 months*, with prepayment charges and associated loan costs transparently listed. Apply online or visit your nearest branch for more information.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

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