Businesses and individuals that are starting to produce positive cashflows – and there are still a few – may be looking at the balance owing on loans taken out during the tensions of the coronavirus outbreak and thinking that they should pay them off.
But it is worth considering what would happen if there was a continuing upward trend in inflation and interest rates, and we were facing recession once again?
If this did occur, downward pressure on profits and earnings would reverse any ability to build cash reserves and may require that we have to revisit the option to take out loans to tide us through.
The issues that could be considered before paying back current loans are:
- Does your existing loan provider charge a low rate of interest? For example, the interest rates on government-backed bounce-back loans are just 2.5%. And if you had to take out new loans at a future date would interest rates be higher?
- Would you be required to make an early settlement payment?
- What is the likelihood that we are facing another economic downturn?
- If you did pay off an existing loan, has your credit score changed in a downwards direction since taking out the settled loan?
Many of these issues require a crystal ball to determine action to be taken, but it may pay to be cautious if you have low-interest loans and are considering an early settlement option.