When a business borrows money from a bank, it often comes with a fixed repayment schedule. However, if the borrower wants to repay the entire loan amount before the end of the loan tenure, this is known as “loan foreclosure”.
While it might seem like a good idea to clear off debt early, banks typically charge a fee for this, known as loan foreclosure charges. These charges vary based on the tenure of the loan and the lender’s terms.
Essentially, foreclosure charges on business loans are a way for banks to recover a portion of the interest they would have earned if the loan had continued for its full term. For instance, IndusInd Bank offers a Quick Business Loan with a loan amount ranging from ₹2 lakhs to ₹20 lakhs, and the entire process is 100% digital.
One of the standout features of this business loan online option is that the loan amount is disbursed directly into the borrower’s existing current account, unlike other banks that require opening a new current account.
However, if a borrower wishes to foreclose the loan early, IndusInd Bank imposes the following business loan foreclosure charges:
- 0-12 months: 5.5% of the outstanding amount
- 13-24 months: 5% of the outstanding amount
- 25-36 months: 3.5% of the outstanding amount
Why are foreclosure charges on business loans important?
1) Cost of early repayment
Foreclosure charges ensure that a borrower understands the cost implications of closing the loan early, helping them make informed financial decisions. These charges can significantly impact the overall savings one expects from foreclosing the loan.
2) Bank’s interest recovery
These charges allow banks to recover some of the interest income they lose when a borrower forecloses the loan before the scheduled period. This helps maintain the bank’s profitability even when loans are closed earlier than expected.
3) Impact on cash flow
For businesses, calculating foreclosure charges is essential to avoid unexpected financial strain, ensuring that early repayment aligns with their cash flow. Proper assessment can help maintain healthy cash reserves while settling liabilities.
4) Loan planning
Knowing the foreclosure charges in advance helps borrowers plan their repayment strategy better and decide whether foreclosure is a viable option. This enables businesses to balance their financial goals while keeping costs in check.
5) Flexible loan management
While early closure might seem attractive, the foreclosure fee often prompts businesses to weigh the pros and cons, considering whether they should stick to the regular EMI schedule or pay off the loan early. A well-informed decision ensures optimal use of available funds without incurring unnecessary costs.
Ending note
Foreclosure charges on business loans are an important aspect to consider when thinking about closing a loan early. These charges vary across banks, and it is crucial for businesses to evaluate these fees alongside their financial situation.
By analysing these charges, businesses can make strategic decisions on whether early repayment is beneficial or if sticking to the original repayment schedule is a better option. Also, being aware of such charges can help businesses manage their loans more effectively, ensuring that they do not face unexpected costs while repaying their debt early.
