It's difficult to determine if, or when, a borrower may choose to prepay their loan.
- PrecisionLender provides the following three methods to address the risk of prepayment:
- Adjusting your target return to reflect that a loan with prepayment protection holds less risk since the "downside" of an early payoff has been reduced.
- Adding a prepayment rate to indicate the rate, expressed as a percentage, of the year balance that is anticipated to be paid off on top of the normal amortization. This will affect your loan's return.
- Adding an adjustment to the funding curve. The adjustment is often lowered for stronger prepayment options to reflect the higher penalty and/or smaller probability of prepayment.
Adding Prepayment Penalties
If your system administrators have chosen to utilize prepayment penalties, then you will see a “Prepayment Option” field on the Opportunity Screen.
- Click the 'Prepayment Option' field
- Click the select the type of prepayment option.
Prepayment Option Types
Your administrators have the option to use PrecisionLender's default prepayment options, enter custom prepayment options, or utilize a combination of both to apply the three prepayment methods.
To determine which methods have been applied to your selection of prepayment options, you can view the prepayment assumptions for the product you're pricing under the 'Commercial Loan Products' tab and the 'Funding Packages' tab on the Assumptions Screen.
See Also: Setting Up Prepayment Options