Paying Off a Private Loan Early

Many borrowers repay a private loan before its maturity date: the property sells sooner than expected, a refinance comes through, or other money arrives. Paying off a private loan early can save interest, but it is not free. GAP loans have an early repayment penalty, and its amount and conditions depend on the lender. This guide explains how to plan an early payoff and what to check first.

Why borrowers repay early

• The property sells, and the loan is paid off from the proceeds at closing.
• A refinance closes, for example with a bank. Banks set their own requirements, and banks can take many months, if not longer, to close.
• Other money arrives, such as the sale of another property or a business payment.

How the early repayment penalty works

GAP loans have monthly interest-only payments, and the principal is due at maturity. A lender who funds a loan for a set term is counting on that interest, and the early repayment penalty applies when the loan ends sooner. There is no single penalty for all GAP loans: the amount and conditions depend on the lender, are explained during loan review, and are set out in the loan documents you sign.

Before you sign, ask:

• How is the penalty calculated, and does it change over the term?
• Is partial repayment allowed, and how is it treated?
• How much notice must I give, and in what form?

Choose the term with an early payoff in mind

Terms run from six months to three years. If you expect to repay from a sale, a term that covers a realistic selling time with room to spare protects you from running out of time. A much longer term than you need, on the other hand, makes an early payoff and its penalty more likely. Discuss both during review. Plan your exit before you borrow explains how to match the term to your repayment plan.

Is paying early worth it?

Before paying off a private loan early, compare two numbers from your own loan documents:

1. the monthly interest you would still pay between the payoff date and maturity;
2. the early repayment penalty for paying on that date.

If the interest you would save is larger than the penalty, paying early saves money. If a sale or refinance is paying off the loan anyway, the question is simply what the payoff will cost, so you can plan the numbers for that closing.

Steps to pay off the loan

1. Read your loan documents for the notice and payoff terms.
2. Tell the lender in writing that you plan to repay, and when.
3. Confirm the payoff amount: the principal, interest to the payoff date and any penalty. Confirm payment instructions by phone, using a number you already have.
4. Ask your attorney how the release of the mortgage will be documented and registered in the National Registry, and keep proof for your records.

Borrowers pay lenders directly, so the payoff goes to the lender, or is handled at the closing of your sale or refinance. If a problem comes up, GAP can help with communication.

If you sell the property

When the property securing the loan sells, the loan is paid off from the sale proceeds at closing, including any penalty. Make sure the attorneys handling the sale have the confirmed payoff amount well before the closing date. Selling property in Costa Rica walks through the sale.

Frequently Asked Questions

Is there a penalty for paying off a private loan early?

Yes. GAP loans have an early repayment penalty. The amount and conditions depend on the lender and are explained during loan review.

Can I repay part of the loan early?

It depends on the loan documents. Ask about partial repayment before you sign.

Who do I pay when I repay early?

You pay the lender directly, or the payoff is handled at the closing of your sale or refinance.

How do I get the mortgage released?

Ask your attorney how the release will be documented and registered, and keep proof of the registration.

This article is general information only and is not legal, financial or tax advice. Penalty terms depend on the lender and the signed loan documents. Every loan depends on property review, documentation and lender approval.

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