Interest Only
A borrower can negotiate with lenders interest only repayments. Lenders can only allow this situation if the business has large cash-flow deposits that are capable of making large interest only repayments before its period expires.
- The common interest only commercial term loan is 1-2 year term.
- Select commercial loan lenders prefer a 5-year term.
- A 15-year term is not applied to commercial loan but residential property loans because of the security.
- Most of the lenders around prefer that a borrower selects a no interest only loan term as it is less risky to disburse.
Principal and Interest Commercial Loans
A borrower can opt to select the principle and interest terms instead of interest only in loan acquisition depending on borrower’s needs. There are a diverse principle and interest terms available as follows:
30-year term: For a borrower to qualify for a 30-year loan term period, there must be a residential property presented as security.
20-25 year term: Only a few lenders when given a commercial property as security can be able to disburse such a loan to the borrowers.
15-year term: It is the most common commercial loan term that many lenders prefer to disburse to borrowers.
5-7 year term: Such kind of commercial loan is best suited to borrowers who want to finance a commercial equipment or facility.
Shorter term: Such loan terms apply to short-term development, invoice discounting and business loans that provide short-term benefits.
Redraw
This kind of a loan feature permits borrower’s withdrawal of already contributed loan amount as a payoff. Whatever extra payoff payment a borrower makes towards the loan forms the balance of redraw facility. When a borrower diligently makes the expected monthly repayment, the borrower is allowed to withdraw extra money whenever there is the need. Through a redraw facility, a borrower enjoys the benefit of utilizing extra repayments to reduce the loan’s principal amount thus lessening the interest payable.
When redrawing money, only a certain withdrawal amount is allowable, and a redraw fee is usually charged. Such a redraw caveat encourages saving while discouraging too much redrawing. For lenders to emphasize that only extra money is needed to be redrawn, they place yearly redraw limits.
Offset
It is a normal savings and transaction account that link to a commercial loan account. Therefore the money in the offset account reduces the interest charged on loan since it offsets the loan balance daily.
Money being in your transaction account is beneficial to offset on a daily basis. What a borrower needs to ensure enough money is available on the offset account to ensure the loan can be serviced through monthly repayments.
Difference between redraw and offset accounts
While both offset and redraw facilities reduce a borrower’s loan balance through savings, they are suited for various kinds of borrower’s needs. The key difference between an offset and a redraw, transaction money for offset is easily accessible daily for redraw there are limited withdrawal numbers. Also, for an offset, only the normal transaction fee is incurred while for a redraw there is an extra redraw fee incurred.
Some tips aid in selection between a redraw and an offset which is necessary for a borrower:
- Minimizing interest owed on repayments: A borrower could choose loan offset facility to offset loan interest and have everyday access to that account.
- Loan principal payoff: using this option a redraw facility is utilized to pay-off the loan principle balance instead of reducing the interested. It suits a borrower who wants to pay-off the loan rapidly.
Using the extra money to pay the loan significantly reduces the long-term burden of the loan irrespective of which facility a borrower utilizes.
