It may seem like only yesterday that you took out your EIDL loan from the US Small Business Administration to help your business weather the challenges of the recent pandemic. But for most EIDL recipients, 30 months of payment deferrals are about to come to an end, and minimum payments will be due to the SBA starting in the next few months (depending on when you received your initial loan.)
This post is meant to point out a few considerations that may be a surprise to some.
First, although payments have been deferred for the first 30 months of the loan, interest has been accruing at 3.75% annually since day 1. So some EIDL borrowers may be surprised to discover that they owe more than the initial principal balance. You should have received an email from the SBA directing you to create an online account with a specific online portal where you can access information on current loan balances, payment due amounts, etc. It would be a good idea to do this now and plan accordingly.
Second, initial loan payments will be applied initially only to accrued interest until it is paid off. This means that if borrowers simply pay the minimum amount due, it will be many months before their payments actually start to chip away at the principal balance. (For instance, I did an amortization schedule for one client recently and found that it would take about three years to pay off all the accrued interest with minimum payments only.) So you might want to consider paying more than the minimum to pay off the accrued interest more quickly and start paying down the principal sooner.
Finally, although payments were deferred for 30 months, the actual loan term did not change. That means that if borrowers pay only minimum payments for 30 years, there will be a large “balloon” payment due at the end, representing the remaining principal. (In the case of my client, I calculated that the balloon amount would be roughly 8% of the original loan amount.) Borrowers looking to reduce their overall indebtedness more quickly or to avoid the balloon liability should consider routinely making extra principal payments to avoid a large liability at the end of the loan term.