Debt can cause stress, especially if you have multiple outstanding loans. So, paying off an equipment loan early can seem like a no-brainer — but you might be surprised to learn there are certain situations when it can hurt more than help.

In this article, we’ll first discuss whether you can pay off an equipment loan early, and then we’ll get into whether or not you should. Ask yourself these questions as you decide when to pay off your commercial equipment loan.

What Type of Loan Do I Have?

Your answer to this question determines whether or not you can save money by paying off your loan early. Different types of loans may not incentivize early payoffs or may even include an early payoff penalty.

Amortizing Loan

With an amortizing loan, you make periodic payments that apply to both the principal balance and interest. Typically, payments on amortizing loans mostly pay down interest during the early part of the term. As the loan term goes on, more of each payment goes toward your principal balance.

Paying off an amortizing loan early can save you from having to pay future interest. However, some lenders include an early payoff penalty in the loan contract since an early payoff will cause the lender to lose out on interest.

Should I Pay It Off Early?

It can be beneficial to pay off amortizing loans early. Check whether your loan has an early payoff penalty built into the loan agreement.

Non-Amortizing Loan

A non-amortizing loan is a type of loan that usually has no fixed payment schedule. Instead, you pay off the principal balance in a lump sum. The amount of interest in a non-amortized loan is fixed, so no matter when you pay off a non-amortized loan, the lender gets the same amount of total interest.

Should I Pay It Off Early?

It may be possible to pay off your non-amortized loan early, but doing so won’t save you any money in interest payments.

RELATED: The Beginner’s Guide to Commercial Equipment Financing

Do I Have Sufficient Funds to Pay Off My Loan?

Once you’ve determined whether you can benefit from paying off your loan early, you need to consider whether you can afford to do so without jeopardizing the financial stability of your company.

I Have Just Enough Funds to Pay Off My Loan

If you tie up all your cash by paying off a loan early, you could put the entire stability of your company’s finances at risk. And even if the worst doesn’t happen, you might end up just having to take out another loan before long when you find you can’t afford to maintain your equipment or acquire new equipment. So, you want to make sure you’re not using all or most of your available cash reserves to pay off your loan early.

Should I Pay It Off Early?

No. Using all your available cash to pay off a loan can jeopardize the financial stability of your company.

I Will Still Have Funds in Reserve After Paying Off My Loan

If you can safely pay off a loan while still keeping a healthy cash flow for your business, it could be worthwhile to pay off your loan early. This is especially true if you have other types of loans or debts in addition to the equipment loan and you want to minimize your debt service coverage ratio.

Should I Pay It Off Early?

It may be worth paying off your loan early if your company will still have a healthy cash flow after the early payoff.

Should I Pay Off a Commercial Equipment Loan Early?

Now that you’ve established whether you can pay off the loan early, it’s time to look at why you want to do so. Even if you have an amortized loan with no early payoff penalty and the funds to pay off your loan early, it doesn’t mean an early payoff is the right move for your business. Whether you should pay off an equipment loan early depends on how it will affect your company’s long-term health.

Valid Reasons to Pay Off an Equipment Loan Early

Bad Reasons to Pay Off an Equipment Loan Early

Team Financial Group Offers A Variety of Equipment Financing Options to Fit Your Needs

At Team Financial Group, we offer leases and finance agreements that we can customize to fit your unique business needs. We’re dedicated to helping our clients grow and thrive by providing efficient and flexible financing options and personalized service.

Ready to get started? Applying is easy! Just visit our application page, fill out your contact information, and one of our commercial financing experts will get in touch to help walk you through the application process and determine which option is right for you.

If you have questions or concerns you want to address before you begin the application process, we can help. Get in touch with us by calling 616-735-2393 or by filling out our convenient online contact form.

The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.

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