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Beware The Ball And Chain . . . of a loan: avoiding prepayment penalties.

By Doug Hood

Opinions expressed by Entrepreneur contributors are their own.

Q:I've been approved for a loan to refinance my company'sbuilding. I called my lender for a final loan balance, and hereminded me that my loan had a prepayment penalty. Afterconsidering the rollover of the prepayment penalty into the newloan, the difference in terms and monthly payment was too close tobother refinancing. Can I do anything to have the prepaymentforgiven or reduced?

A:It's likely too late in the game to negotiate. Forgivenessisn't a word I associate with banking, especially whereprepayment penalties are concerned. By definition, a prepaymentpenalty is a fee a borrower agrees to pay if he or she pays theloan balance prior to its maturity date. It exists to protect thelender's profit margin.

There isn't any industry standard for prepayment penalties,but they usually run 3 percent of the loan's out-standingprincipal balance the first year on the books, 2 percent the secondyear and 1 percent the third year.

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