Prepayment fees on 7(a) loans only apply in the first 3 years of a long term loan (loans 15 years or longer) and are not retained by the lender but are remitted to SBA directly to help defray costs in the loan product. The prepayment fee is enforced if the prepayment amount exceeds 25% of the outstanding balance AND the prepayment is made within the first three years after the date of first disbursement (not approval) of the loan proceeds.
- 1st year, 5% of the amount of prepayment
- 2nd year, 3% of the amount of prepayment
- 3rd year, 1% of the amount of prepayment
The borrower may pay up to 25% of the balance outstanding each year and avoid a prepayment fee. The 25% is cumulative for each year. If you prepay more than 25% each year, you will owe the fee for each of the first three years.
Loan balance at time of first prepayment = $100,000
1st prepayment made in 2nd year = $10,000 (no penalty)
2nd prepayment made in 2nd year = $17,000 (now penalty is triggered)
25% of $100,000 = $25,000 (trigger)
2nd prepayment, added to first prepayment = $27,000
Prepayment amount = $27,000 x 3% = $810