EIDL Loan: Why Do I Owe More Than My Loan Amount
I received a question from a listener yesterday that I thought everyone would be interested in. She’s beginning to make payments on her EIDL loan and logged into the portal after the first payment was made and saw that the balance was more than the original loan amount and her whole payment was allocated to interest.
Let’s Talk about WHY?
Alright, let’s talk about why the EIDL loan did accrue interest during the deferment period. The deferment period was that 20 months where you didn’t have to make a payment, so it has been accruing interest. That interest for most people was 3.75% interest, if you were a nonprofit, that rate decreased to 2.75%.
So if you take your loan amount and multiply it times 0.0375 and divide that by 12, that tells you how much interest was accruing each month during the deferment period.
So since you’ve been accruing all of this interest along the way, it’s going to take quite some time before your payments begin to have any effect on the principle of the loan. The balance of the loan will only decrease after you’ve began making payments enough to replace all of that interest all along the deferment period.
Let’s Talk about WHAT That Means
So the follow up question to that then is, should I take a big chunk of money and just pay down the interest so I can start making principal payments? Well you could, but let’s talk about what that means.
You took that loan probably for a reason. Now, if you don’t need it at all and don’t want to have any interest and you have no other debts in your business, you may want to consider paying it off early or making a bigger principle payment. But for most businesses, 3.75% interest is pretty darn good and you probably have debt that’s higher than that for something else.
So if you’re going to make a principle payment to something, make sure it’s a smart payment and you’re paying off the highest interest rate you have, as long as that makes good sense with your full debt payoff plan.
So if you have questions about paying off the debt or other potential strategies to get to more of the principal being paid off, I’d suggest strongly that you talk with your CPA. If you’re in need of one, hey, I’m here to help.
We may be able to work with your business to help you employ some strategies to reduce your debt, and better yet, grow your business and minimize taxes. We want to be along with people on that journey to see their full potential. Make sure you subscribe to our YouTube channel where we’ll continue to answer questions about the EIDL loan.
For additional read: EIDL Loans: Best Practice for Making Payments
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Donna Bordeaux, CPA with PYOPAccounting.com
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.