Paying off a loan early

5 Replies

About a year ago we took out a $2.6M loan for a commercial property. 

Things got really complicated with the deal and construction took much longer than anticipated. This, coupled with a reduction on the price of the property given to us by the seller and the passage of about a year leaves us with needing only a few hundred thousand dollars when we finally closed a few months ago.

Being left with over $2M on the loan, we've been making rather large payments to get rid of the amount in excess of what we need. The bank, however, is not happy and giving us a hard time.

I told my dad that they have a right to be angry because they're making money off the interest; paying the loan back in a matter of months doesn't exactly provide them with a steady stream of income off the loan. He's determined to have it paid off by the end of this month but I can't help but feel that is somewhat disrespectful to the bank.

On the other hand, I can understand where he is coming from. What's the point of making payments and getting charged interest when we don't need that much of loan anymore. The financing has no pre-payment penalties in place either.

Our fault for not renegotiating the terms of the loan and we definitely did not anticipate things getting so drawn out with the deal. 

Thoughts on being in a situation like this? Is it "wrong" to essentially give them back most of the loan in such a short time?

My first impressions are: 

 - If the bank didn't want you to repay quickly, they should have put in a pre-payment penalty.   So, that is on them.  You will have to decide how important the relationship is to you.

- Second, why on earth would you pay the loan off early? Unless it the interest is really high, I would take those funds and invest in another property. That is the way to maximize returns and reduce total risk. A paid-off property usually kicks off more income than can be offset by depreciation and is a lawsuit magnet.

@Greg Scott Thank you for the reply sir. I think what I'm trying to convey to my dad is the relationship element and how that can potentially be jeopardized if we just hand them most of the money back. Can't seem to properly relay that to him though.

The interest rate is pretty high relative to what it is today unfortunately. Again, our fault for not doing a better job of negotiating the terms early on. I agree with you on taking the funds and investing in another property but I'm dealing with someone who hates loans and places priority on max income from properties.

Account Closed Here is an alternative to consider.   Go back to the bank and ask for a rate & term refi.   If their choice is to cut the interest rate or have the loan paid back, they might choose to give you a lower rate.

Regarding your father's mindset, and I'm being direct here, he simply seems afraid of debt.  Paying off the loan usually does not maximize income.   

@Greg Scott This is what I suggested to him. I don't see any harm in asking for rate/term refi.

He definitely does not like debt, nor is he particularly open to seeing things differently which is why I'm trying to get as many perspectives on the matter as I can. 

Originally posted by @Greg Scott :

Account Closed Here is an alternative to consider.   Go back to the bank and ask for a rate & term refi.   If their choice is to cut the interest rate or have the loan paid back, they might choose to give you a lower rate.

Regarding your father's mindset, and I'm being direct here, he simply seems afraid of debt.  Paying off the loan usually does not maximize income.   

 Can't put it much better than that.