How a commercial prepayment penalty is worked out
A prepayment penalty is a charge for repaying a commercial loan before the lender expected. The loan agreement sets it, and the clause can take several forms. This calculator covers the ones that can be worked out from the loan terms: a percentage that steps down each year of the loan, one percentage every year, a number of months of interest on the amount repaid, interest through a lock-out period, and the SBA 7(a) fee.
A step-down schedule such as 5-4-3-2-1 charges 5% of the balance if you repay in the first year, 4% in the second, and so on until it ends. The percentage applies to the balance you repay at the time, not to the original loan. A lock-out charges interest on the amount repaid until the lock-out ends.
Yield maintenance and defeasance are not calculated here. Both depend on Treasury yields on the day you repay and on the exact wording of your loan documents, and the sources we found describe them only in general terms. Ask your lender for a payoff quote when your loan has either clause.
To see the payment and total cost of the loan itself, use the business loan calculator .
Worked example: $750,000 at 7% after 30 payments
A $750,000 loan at 7% with payments calculated over 20 years, repaid in full after 30 payments with a 5-4-3-2-1 step-down, is in loan year 3, so the penalty is 3% of the amount repaid. The balance is $702,947.41 and the penalty is $21,088.42, so you pay $724,035.84 to settle.
Paying off the loan avoids $518,148.41 of interest you would otherwise pay over the rest of the term. After the penalty, the saving is $497,059.99. The penalty is 3% of the amount repaid.
Waiting for the next loan year is rarely worth it here. Six months on, the penalty falls to $13,850.22, but you pay $24,451.99 of interest in the meantime, so waiting costs $17,213.79.
Step-down, flat percentage and months of interest
The same loan with one flat 3.5% charge costs $24,603.16. With three months of interest on the amount repaid, the charge is $12,301.58, which is 1.75% of the amount repaid.
A months-of-interest charge is the monthly interest on the amount you repay, at your loan rate, times the number of months in the clause. It does not step down, so it shrinks only as the balance falls.
Lock-out periods
With a 60-month lock-out and 30 payments made, 30 months remain. The charge is interest on the amount repaid for those 30 months, which is $123,015.80, or 17.5% of the amount repaid. Waiting six months cuts the charge to $96,951.53, which saves $1,612.27 after the interest you pay in the meantime.
Contracts word lock-outs in different ways, and some also add a premium or switch to another clause afterward. This calculator uses simple interest on the amount repaid. Check the wording in your loan agreement.
The SBA 7(a) prepayment fee
The fee is set by federal rule 13 CFR 120.223 and is paid to SBA, not to the lender. It applies only when the loan has a maturity of 15 years or more, you prepay more than 25 percent of the loan's highest balance in a 12-month period, and you do so in the first three years after the first disbursement. It is 5 percent of the prepayments in the first year, 3 percent in the second and 1 percent in the third.
On a $500,000 loan over 25 years, repaying everything after 5 payments means a balance of $496,877.64 and a fee of $24,843.88. A $50,000 lump sum after 14 payments is under the 25% limit, so the fee is $0.00. A $200,000 lump sum after 30 payments is in the third year, so the fee is 1%, which is $2,000.00.
This page models only the 13 CFR 120.223 fee. A loan with a maturity under 15 years is not covered by it, and other SBA programmes are not modelled.
Paying part of the loan
A $150,000 lump sum on the $750,000 loan in loan year 3 costs 3%, which is $4,500.00. Your regular payment stays the same, so the loan ends 70 months sooner, with 140 months left. You avoid $262,281.41 of interest, a saving of $257,781.41 after the penalty.
When the penalty is more than the saving
Near the end of a loan there is little interest left to save. On a $100,000 two-year loan with a 5% charge, repaying everything after 20 payments means a balance of $17,650.87 and a penalty of $882.54. The interest you would avoid is $258.16, so the penalty is $624.39 more than the saving.
What this calculator assumes
It assumes a fixed rate, equal monthly payments, and that you repay straight after a scheduled payment, with no accrued daily interest, lender fees or legal costs. The term is the period the payments are calculated over, which can be longer than the period before a balloon payment. Your lender's payoff statement is the figure that counts.
This page uses US terms and US dollars. The country choices above the inputs open separate pages. Choosing United Kingdom opens the early repayment charge version, which uses UK terms and has no SBA or lock-out choices.
For a UK loan, use the UK commercial loan prepayment penalty calculator .
Inputs for the US prepayment penalty calculator
How the penalty is set
The clause in your loan agreement. Step-down uses the five yearly percentages.
What you repay
The whole balance, or a lump sum with your regular payment unchanged.
Original loan amount
The amount first borrowed, before any payments.
Interest rate
The yearly rate, charged monthly.
Repayment term
The years over which the payments are calculated.
Payments already made
Monthly payments made so far. The repayment follows the last one.
Lump sum
Used only when you repay a lump sum. It must be below the balance.
Charge in loan year 1
Percent of the amount repaid in the first 12 months. The flat choice uses this box.
Charge in loan year 2
Step-down choice only.
Charge in loan year 3
Step-down choice only.
Charge in loan year 4
Step-down choice only.
Charge in loan year 5
Step-down choice only. No charge after year 5.
Months of interest
Used by the months-of-interest choice.
Lock-out period
Months from the first payment. Used by the lock-out choice.
CALCULATOR QUESTIONS
US commercial loan prepayment penalty calculator questions
How do you calculate a prepayment penalty on a commercial loan?
Multiply the balance you repay by the percentage in your loan agreement for the year you repay. On a balance of $702,947.41, a 3% penalty is $21,088.42.
What does a 5-4-3-2-1 prepayment penalty mean?
It is a step-down schedule. You pay 5% of the amount repaid in loan year 1, 4% in year 2, 3% in year 3, 2% in year 4 and 1% in year 5, with no charge after that.
Is it worth paying a prepayment penalty?
Compare the penalty with the interest you avoid. On the worked example, the penalty is $21,088.42 and the interest avoided is $518,148.41, so repaying saves money. Near the end of a loan the penalty can be larger than the saving.
Does an SBA 7(a) loan have a prepayment penalty?
A fee can apply under 13 CFR 120.223 for loans of 15 years or more, if you prepay more than 25% of the highest balance in one of the first three years. It is 5%, 3% or 1% of the prepayments. A $200,000 lump sum in year 3 costs $2,000.00.
Why does this calculator not work out yield maintenance or defeasance?
Both depend on Treasury yields on the payoff date and on the formula written in your loan documents. Ask your lender for the figure and compare it with the interest you would avoid.
Should I wait until the next loan year to repay?
Only if the lower charge is bigger than the interest you pay while waiting. In the worked example, six months of waiting costs $17,213.79 more than repaying now.