What are Accelerated Payments
Accelerated payments is a term generally associated with making additional unscheduled payments on an invoice or non-revolving loan.
BREAKING DOWN Accelerated Payments
Accelerated payments can be a consideration across all types of accounting methodologies. In business deals accelerated payments can help a company to mitigate accounting payment costs. In credit products the acceleration of payments will usually help a borrower lower their interest costs since extra payments will reduce the principal balance tracked by the lender in managing the product’s amortization schedule. In some situations, loan borrowers may have a limit on the accelerated payments they can make or they may incur a penalty for early repayment.
Amortization and Non-Revolving Loan Payments
The majority of non-revolving loans will have an amortization schedule that defines how much principal and interest will be paid with each scheduled payment so that the loan will be paid-off at the end of an established term. The amount of interest paid with each payment can be based on a fixed or variable interest rate. Each month’s payment will payoff differing amounts of principal and interest with interest decreasing over time. The higher the rate of interest on a loan, the more beneficial it can be to make accelerated payments.
Accelerated payments are payments that are made above and beyond the required monthly loan payment. Accelerated payments are typically applied to a loan’s principal which reduces the outstanding balance and required interest in future payments. Overall, more accelerated payments result in a faster principal payoff which can lead to substantial interest savings.
In mortgage loans, accelerated payments can be beneficial for increasing a borrower’s home equity. Accelerated payments can also help a borrower to more quickly obtain title rights to their secured real estate collateral which can simplify the process for resale.
A borrower seeking to aggressively payoff their loan balances using accelerated payments should seek loans that do not have any prepayment penalties. Lenders can institute prepayment penalties on all types of loans. Prepayment penalties include a fee for accelerated payments above a specified limit.
In mortgage lending a number of prepayment terms may apply. Some mortgage loans may set limits for annual accelerated payments. These lenders will typically only allow a borrower to payoff up to 20% of the loan balance per year. Often mortgage loans will also have provisions which institute prepayment penalties in situations that causes a change to the mortgage loan terms such as the sale of the collateral or a refinancing.