Author Topic: Appropriate discount for partial loan prepayment?  (Read 1260 times)

Zoot Allures

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Appropriate discount for partial loan prepayment?
« on: May 31, 2016, 12:47:24 PM »
Hi all,

Looking for some advice for my mom. Several years ago she sold some land and gave the buyer a 10-year seller-financed loan at 5% interest. She's on good terms with the buyer, who wants to prepay a portion of the loan and is hoping to get a discount for doing so. There are 5 years remaining on the loan, and the principal is about $200k. The buyer wants to prepay $50k.

My mom could use the cash and wants to do this, but she understands there's an opportunity cost with the interest she'd be forgoing. I'm trying to help her figure out what kind of discount would be reasonable in this situation. I was thinking the buyer could get an additional 10% of the prepaid amount deducted from the remaining balance, but I'm really just guessing. Any ideas? Are discounts for prepayment even a thing? Seems like the issue with prepayment is usually whether a penalty will be applied, not a discount. But again, my mom could use the cash.
« Last Edit: May 31, 2016, 12:55:26 PM by Zoot Allures »

thd7t

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Re: Appropriate discount for partial loan prepayment?
« Reply #1 on: May 31, 2016, 01:17:34 PM »
Did the buyer ask for a discount? Could your mom point out the amount that the buyer will save by prepaying? This discount doesn't make any sense.

Retire-Canada

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Re: Appropriate discount for partial loan prepayment?
« Reply #2 on: May 31, 2016, 01:20:30 PM »
Any ideas? Are discounts for prepayment even a thing? Seems like the issue with prepayment is usually whether a penalty will be applied, not a discount. But again, my mom could use the cash.

A discount makes no sense as your mom will be out 5%/yr of the outstanding balance less inflation.

If she wants the lump sum payment she could offer to accept it with no penalty. She is free to give the discount. It all comes down to how bad she wants the money vs. how bad the borrower wants to not pay the interest.

Zoot Allures

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Re: Appropriate discount for partial loan prepayment?
« Reply #3 on: May 31, 2016, 01:25:09 PM »
Thanks for the reality check. I agree this doesn't make much sense unless my mom really needs the cash, which of course is something only she can determine.

SwordGuy

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Re: Appropriate discount for partial loan prepayment?
« Reply #4 on: June 04, 2016, 04:22:26 PM »
That's a standard real estate investor tactic.   You are being played.

MDM

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Re: Appropriate discount for partial loan prepayment?
« Reply #5 on: June 04, 2016, 04:40:39 PM »
...the buyer...wants to prepay a portion of the loan and is hoping to get a discount for doing so.
...my mom could use the cash.
I agree this doesn't make much sense unless my mom really needs the cash, which of course is something only she can determine.
Just piling on top of all the good advice already given: the buyer "automatically" gets a discount by not having to pay further interest on any lump sum paid now.

Your mom might imagine what a bank loan officer would tell  her if she had a bank loan and wanted a discount from the bank for prepaying - then tell that to this buyer.