Short term loans have terms of up to 18 months which is great when you need short term cash. But if you can, should you pay off short term loans early? In comparison with other types of loans, these require weekly or even daily repayments. What many people fail to understand is that the interest rate is always higher.
The lender might tell you that you’ll be having a 20% interest rate. You’re fine with that, and you take it. But, by making daily or weekly payments, the interest rate actually increases. Before you know it, you’ll be paying 30% or even 35% interest rate.
Short term loans, in this light, can be anything but helpful. So, is it worth it to pay it off earlier? Well, it depends on what you understand by “pay off early” – it can either be refinancing or repaying the entire bulk of the money you owe.
Paying off your short term loans is going to be a good practice or a bad one, depending on the two situations mentioned above.
Let’s imagine you’ve found a lender with much more pleasant terms and you wish for them to buy you out. They promise lower interest rates, and you go for it. What you don’t know is that they will be using part of the money you want to borrow to pay off the first lender.
If they don’t do it, they will always be in the second place, in the sense that you’ll be obliged to pay the first lender. Now, if you want more money, they will use part of that money to buy out the first lender.
You’ll be getting some quick money into your account, but the price of that money is absolutely astonishing. The interest rate, too, will grow even higher. This is where paying off short term loans earlier does not make sense.
Unfortunately, many business owners allow themselves to be tricked this way. They end up paying almost or even double the sum they’ve borrowed. Depending on the size of the company, this can be a tragedy.
They will be paying that loan early, but the next one will have too many strings attached to it. Refinancing seldom makes sense because the interest rate will always be growing instead of decreasing, even though it may look like it’s much better than the first one.
Dissolving the debt
This can happen only if you don’t need any short term loans and your company grew to heights so unimaginable that you’ve made up the money to pay the debt in one huge rate. This is less likely, obviously. Miracles rarely happen, if at all.
Save money by paying your loan off early
But, in this case, paying off the loan early is recommended. You’ll be sparing yourself some really good money you’d otherwise spend on the interest rate. By doing this, you will also increase your APR (Annual Percentage Rate), which is a good thing.
Negotiate with the lender
If you want to pay any short terms loans early, you should negotiate with the new lender. For instance, you could get a prepayment incentive, which is basically a discount on the interest rate.
It’s not huge, but it’s certainly better than nothing. Moreover, if possible, try to settle the lender on a weekly repayment. This way, the interest rate will be steady and won’t climb up.
Check out your margins
Another thing that is crucial, so you must make sure you will check out, is your margins. You must do the math on the expenses (the real ones, not some estimates) and the growth (again, the real one, not the one you think will happen).
These will allow you to get some perspective on how much money you actually need and if you will be able to afford the loan in the first place. Unfortunately, it doesn’t put you in a safe position from the interest rates, but it will enable you to get a much better offer.
Short term loans
Short term loans are a real help for people who are in need of funding that is repayable in one or less than a year. If you pay off short term loans early, however, there is a two-edged sword. On one hand, it can save you from the high interest applied to them.
Do Your Research
On the other hand, it can get you in more debt than you ever imagined. That’s why you should never underestimate doing some research first. No two lenders are ever the same.
Look for incentives
Prepayment incentives and weekly repayments are the things you should aim for. With us, you will find information about these and the perks and pitfalls of paying short term loans early.
And you should take the people that have been victims of the disadvantages of doing this as examples so that you won’t be in their position. We hope you’ve learned something really valuable here.
Now you will be able to advise other people that may be prone to falling into the pitfalls we’ve outlined here.