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Timing Your Loan Repayments Optimally

Money, Finance, Mortgage, Loan, Real-Estate, Business

Whilst there are many types of loans, they can all usually be placed into one of two categories: secured loans and unsecured loans. Secured loans are protected by an asset, whilst unsecured loans are not. For example, a house or a car could be a reasonable asset to use as collateral.

However, whilst this may be the main technical difference between the two, it doesn’t mean there’s few other differences as a result of the security. Secured loans will be a lower interest and much more readily available - this remains true. However, unsecured loan lenders used to be more picky, which meant jumping through more hoops was required. You also need a very strong credit score for unsecured loans, and any slack in this area will lead to further increased interest rates. 

A lot has changed, though, with the rise of platforms that join lenders to borrowers. The larger volume of choice, removed barriers to entry and better accessibility has meant that unsecured loans are now even easier to attain with a poor credit history, and are even quicker to get hold of than secured bank loans. They still cost more in interest, of course.

So why take an unsecured loan? Well, they are usually for urgent, short term needs. The fact that they’re short term means repayments are limited, so you can limit the damage from the high interest. These are particularly useful for small businesses who typically suffer from cash flow problems. They can tie you over to stay afloat for another month, or even be used for company growth (i.e. to fulfill large orders).

However, as you can see on the business loan repayment calculator by SBLA, interest payments diminish at an increasing rate early on in the loan. This makes sense, as the interest is applied to the current outstanding amount, and so it isn’t fixed. So, what kind of flexibility is there regarding repayments?

Small unsecured business loans generally have a repayment schedule with no fines for early repayments. This is a huge advantage compared to secured bank loans, who usually have early repayment fees and an unclear schedule. If it’s possible to pay off half of your loan very soon after (within one month), then this can dramatically decrease the total amount of interest that will be paid. A large lump sum can take the pressure off the remaining repayments. Quick financing requires flexible and quick repayments; any debt for the length of a year or more should not be taken with such high interest rates.

The lack of early repayment fees then makes it less necessary to organise a high repayment schedule. If you think you can only just make $5,000 per month repayments (which equates to 1 year loan), then trying to push this even higher is a bad idea. Failing to meet monthly payments is going to cost you more, and running this risk isn’t necessary. Instead, arrange a repayment schedule that you’re confident with, and make early repayments where possible.

This is the benefit of non-bank lenders in general. Banks will always prefer long-term loans, although they may sometimes offer short-term ones. They take a long time to process though, with the business plan, administration, presenting your securities and approval checks. Non-bank lenders on the other hand, like Prospa, claim they can provide you with funds in as little as 3 hours. Generally, interest rates will be between 10% and 27%. 

You will also be able to have greater flexibility in not just the repayment schedule but the amount borrowed. You can ask for a specific amount for a specific (and very imminent) time. If you get rejected, you can either alter the terms or go to another loan provider platform. There are plenty, and most offer such flexibility.

However, be careful of companies suggesting that they alone will create the repayment schedule. This can lead to a suboptimal and unnecessarily long repayment schedule. Low repayment will lead to high interest, so make sure to have a say in the schedule - and of course avoid early repayment fees.

Of course, though, if the reason for seeking financing is because of poor cash flow alone, then a long-term secured loan may be preferable. These will damage your cash flow less, and are expected to be long-term. If you have a valid evidence to believe the loan will facilitate some extra revenue, cut future costs (to pay off a seperate high % loan) or growth in general, then these are some of the reasons why a short-term unsecured loan may be preferable. Afterall, you don’t want financing to grow the problem, you want it to mitigate a problem.

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