Sometimes the business is doing better than expected and loans can be repaid before the end of the term. As a result, you may be able to save money, because there are no more interest payments.
This is called special repayment, ie the unscheduled or early repayment of a loan in order to become faster debt-free. The early termination of a loan is regulated in § 489 BGB and is generally permitted – but it can be linked to certain conditions.
A special repayment may pay off especially in the current interest rate environment. Lending rates are currently at historically low levels, so it may be more profitable to borrow a new loan at low interest rates and replace the old, expensive loan.
Prepayment Compensation: Special repayment can be expensive
Since the bank loses money through your termination, it will impose a fine on you, a so-called prepayment penalty. For this the bank is entitled according to § 314 BGB. In principle, you have to compensate for the profits that the bank was able to reckon with according to the loan agreement. In short: that can be very expensive.
Even if the bank terminates the loan for extraordinary reasons, for example because you have failed to meet the interest and principal payments agreed in the contract, the bank may claim damages. For consumer loans, this prepayment penalty is limited to a maximum of 1 percent of the remaining debt. However, this regulation does not apply to commercial loans.
The amount of the prepayment penalty depends on the interest on the loan
Your credit agreement should include a special repayment agreement that shows how exactly the prepayment penalty will be calculated. If you have not made such an agreement in advance, then you need to search the bank for the calculation.
As a rule, the amount of the prepayment penalty depends essentially on three factors:
- How much the interest rates have changed since the contract was concluded
- How long the contractually agreed fixed interest rate would still have to apply
- How much is the remaining debt
Often, the amount of prepayment interest is almost identical to the interest charge that you would have paid if you had adhered to the agreed term. In some cases, the bank lowers the amount out of goodwill, but this reduction will not be high.
To decide if the special repayment is worthwhile, you should compare the amount of prepayment penalty with the return that you could otherwise earn with the money. If the difference turns out to be positive, then the special repayment is worthwhile, even if a compensation is due.
Compensation may be tax deductible
In some cases, you can deduct the prepayment penalty from the tax. For example, if you terminate a real estate loan early by selling the property, you may be able to deduct the compensation from the capital gain, thus reducing your tax burden.
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Entrepreneurs should also exercise caution when it comes to consumer credit
Since the legal regulations for consumer and corporate loans are very different, self-employed should also be vigilant in taking up supposed consumer credit.
If you have a consumer contract, but then uses the money for commercial purposes, then potentially threatening expensive consequences.
For example, if you take out a loan to finance a car as a self-employed person, but then use it mainly for your work, then this is not considered consumer credit. In the event of early termination, this could be a problem for you.
As an entrepreneur, you should generally exercise greater caution in your banking business. Consumer protection directives apply primarily to consumers and not to businesses. This may make a significant difference in the termination of a company loan.