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If you’ve been negatively impacted by the coronavirus pandemic, you may have been looking into partially forgivable loans like the Economic Injury Disaster Loan (EIDL). And if that’s the case, you may wonder what happens after you get an EIDL loan.
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For example, what if you want to pay back what you borrowed early? Is there a prepayment penalty on EIDL loans? If so, what exactly is the Small Business Administration (SBA) EIDL loan prepayment penalty? We’ll address all of these issues so that you can make an informed decision about whether it’s better to pay off your EIDL loan early and save on interest or to keep paying for the life of the loan to avoid penalty fees.
Are There Prepayment Penalties on EIDL Loans?
Let’s jump right in and address whether there’s a prepayment penalty on EIDL loans. After you get an EIDL loan, payments are generally deferred for a period of months to years. Currently, COVID-19 EIDL loan repayments are deferred for two years. You may accrue interest on your loan during that period. You are welcome to start making payments on your loan before your deferral period is over, and there are no penalty fees for paying off your loan early.
Benefits to Paying Off Your EIDL Loan Early
So why would you want to pay off a loan like EIDL early? Maybe you were struggling when you took out the loan, but now business is back to normal and you don’t need the funds. In that case, why let borrowed money sit in your bank account?
And though EIDL loans have low interest rates (3.75% fixed for businesses), even a low interest is still extra money you’re paying for the privilege of borrowing money. If you don’t need it, why pay interest unnecessarily? Paying a loan off looks good on your credit history. Other lenders in the future will see that you paid your EIDL off early, which may help you qualify for other financing down the road when you need it.
Other SBA Loans That Do Have Prepayment Penalties
While there is no EIDL prepayment penalty, that’s not true for all kinds of SBA loans. If you ever consider applying for other SBA loans, be aware that some of them do charge fees if you pay them off early. The 7(a) loan is one example. If you have a loan with a repayment period of 15 years or longer, you’ll pay a prepayment penalty when you voluntarily prepay 25% or more of what you owe and that prepayment is made within the first three years that you have the loan.
Here’s what you’ll pay in prepayment penalty fees for the 7(a) loan:
- During the first year after disbursement: 5% of the amount of the prepayment
- During the second year after disbursement: 3% of the amount of the prepayment
- During the third year after disbursement: 1% of the amount of the prepayment
The 504 loan also has prepayment penalties. These start at the full interest rate (typically around 3% of the debenture interest rate) on the remaining balance of the loan in the first year, and then reduce every year after that. By the 11th year (and beyond) on a 20-year loan, there is no prepayment penalty fee.
If you’re considering applying for any SBA loan and think you might want to pay it off early, it’s wise to read the fine print first to understand whether the penalty fee would be less than the interest you’d pay if you didn’t pay the loan off early.
Are There Prepayment Penalties for the PPP Loan?
If you’ve received the Paycheck Protection Program (PPP) loan, another loan provided because of the COVID-19 pandemic, you might wonder if there’s a prepayment penalty for it as well. These loans have a repayment period of two years. However, if you want to pay off your PPP loan sooner, there are no prepayment fees for doing so.
Is an EIDL Loan Forgivable?
Before you start worrying about prepayment fees for your EIDL, let’s look at whether you even have to repay the loan. The EIDL program has two parts. There’s the actual loan (which, yes, has to be repaid). But there’s also something called an Advance.
Advances (there are actually two: the Targeted and the Supplemental Targeted Advance) are similar to grants in that they do not have to be paid back.
The Targeted Advance is available to businesses that have fewer than 300 employees, that are located in low-income communities, and that have suffered a 30% or greater reduction in revenue because of the COVID-19 pandemic. Up to $10,000 is available through this program.
The Supplemental Targeted Advance has even narrower requirements. Businesses that are located in low-income communities, that have 10 or fewer employees, and that have suffered a 50% or greater reduction in revenue are eligible. An additional $5,000 is available.
Neither Advance has to be repaid, and you don’t have to accept an EIDL loan to qualify for them. Just apply and the SBA will determine whether you are eligible. If you applied for the EIDL and were denied, but you think you should have qualified, you can apply for EIDL reconsideration.
How Can You Pay Back an EIDL Loan Early?
If you’ve decided to pay off your EIDL loan early since there is no prepayment penalty, here’s information on how to do it. You have two options: paying by mail or paying online.
1. Paying Off Your EIDL Loan by Mail
If you’d rather mail a paper check so you can track it, send a check or money order payable to the SBA to:
U.S. Small Business Administration, P.O. Box 3918 Portland, OR 97208-3918
Don’t send your payments to SBA’s Servicing Center or your payment will be delayed in processing. It’s important to include:
- 10-digit SBA loan number
- Business name
- Borrower’s name
- Borrower’s address
- Tax ID/EIN/Social Security number
- Account number
2. Paying Off Your EIDL Loan Online
If you’d prefer to make a digital payment, you can do so at Pay.gov. Debit cards, credit cards and bank account transfers are all accepted forms of payment there. You’ll need to create an account by filling out information about you, your business and your loan. Have your loan number handy.
If you’re ready to pay off your loan in full, just enter the full amount due. You will also have the option to set up automatic payments if you’d prefer to pay it off over time. In this case, you can choose the day and amount you will pay. Note that once the deferment period is over, the SBA may set you up with an automated payment schedule if you haven’t already set this up.
Whether you pay one lump sum or set up recurring payments, you will receive a confirmation email of your payment that you can keep for your records.
Tax Implications for EIDL Advances and Loans
Great news here: The EIDL program loans are not taxable loans, and if you receive an EIDL Targeted Advance or Supplemental Targeted Advance, that won’t be taxed either. You may be required to provide details on either your EIDL loan or Advance come tax time, but it shouldn’t increase what your business or you personally pay in taxes.
The EIDL can be a business saver. And now that you know there is no EIDL loan prepayment penalty, you may be more interested in applying for an EIDL loan to help your business get on its feet. But, of course, there are eligibility requirements your business has to meet if you want any of this funding.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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