Prepayment vs Extension: Optimize Your Exit
Prepayment vs Extension — Key 1
Compare total interest under both paths; don’t ignore extension fees.
Prepayment vs Extension — Key 2
Refinance only if rate cut beats transaction costs.
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Also read
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Prepayment vs Extension: Optimize Your Exit — Deep Dive
This expanded guide dives into the details of asset‑backed lending so you can compare offers, structure safer deals, and plan clear exits. It covers valuation, haircuts, LTV, fees, custody, legal perfection, and risk controls.
Our goal is practical clarity: normalize quotes, model payments, and test downside so you avoid forced sales. Every section concludes with actions you can apply immediately.
Step‑by‑Step Framework
- Collect term sheets and put them on the same baseline (term, repayment type, haircut).
- Compute the all‑in APR by adding origination, storage, insurance, and other fees to the nominal rate.
- Document valuation method (spot, rolling average, comps) and update frequency; confirm trigger LTV and cure windows.
- Verify custody, insurance, and legal perfection (UCC‑1/title); restrict movement authority where appropriate.
- Run a stress scenario (e.g., −15% to −30%) to see if a margin call would occur; size buffers accordingly.
- Check payoff logistics and release procedures; time is money at exit.
- Negotiate: caps on pass‑throughs, partial fee rebates for larger tickets, and flexible cure terms.
| Factor | Recommended | Why it matters |
|---|---|---|
| Timeline | 2–5 business days | Docs readiness speeds closing |
| Collateral | Liquid vs Illiquid | Drives haircut |
| Exit plan | Refi / Sale / Cashflow | Align structure |
| Fees | Origination / Storage | Negotiate caps |
| Risks | Market / Legal / Counterparty | Mitigate via buffers & custody |
Worked Example
Suppose the asset is valued at $100,000 and the lender applies a 20% haircut. Net collateral becomes $80,000. With a target LTV of 40%, maximum loan is roughly $32,000.
If the nominal APR is 12% for 24 months and you pay $800 in upfront fees, total carrying cost would be roughly $8,480. The simple effective APR approximation is about 13.2%.
Stress test: a −15% price move lifts LTV and could trigger a call depending on thresholds — keep a cash buffer.
Mini Calculator — Effective APR with Fees
Estimate true cost including origination and monthly storage/insurance.
Pitfalls & Pro Tips
- Headline rates without fees are misleading—compare all‑in APR on a normalized basis.
- Thin markets warrant larger haircuts and lower starting LTV.
- Keep emergency liquidity separate from the pledged asset to handle calls quickly.
- Clarify default mechanics and auction rules before signing.
- Organize documents for fast refinancing when conditions improve.
Extended Analysis
Valuation & Market Microstructure
Valuation is not only about the headline price: bid‑ask spreads, depth of order books, auction cadence, and dealer inventories drive the liquidation value a lender can realistically expect. A conservative lender discounts thin venues and rolling averages that lag inflection points. For borrowers, documenting recent comparable sales, floor prices in wholesale channels, and any transfer restrictions reduces the haircut and increases the lendable value without inflating risk.
Haircut Design Under Volatility
Haircuts absorb adverse price moves and disposal frictions. In stable markets, lenders may accept tighter haircuts, but when volatility or correlation spikes, cushions widen quickly. An adaptive haircut policy—tied to realized volatility bands or liquidity indicators—can keep funding predictable across regimes while protecting both sides from forced liquidations.
Trigger Design & Cure Mechanics
Trigger LTV and cure windows determine whether a borrower has enough time to top up collateral during fast markets. Short windows reduce lender exposure but increase borrower failure risk. Clear, automated notices and pre‑agreed funding rails (e.g., same‑day wires, pre‑approved wallets or vault accounts) make margin workflows survivable in stress.
Custody, Segregation & Movement Controls
Segregated accounts and auditable movement policies reduce fraud and operational risk. Borrowers should understand who can authorize movements under which conditions, and what happens in default. Perfection filings, title liens, and trustee/escrow designs matter as much as rate because they decide enforceability and timelines at exit.
Fee Architecture & True APR
Two term sheets with similar rates can diverge materially after adding origination, storage, insurance, legal, and broker fees. Use a consistent framework to compute effective APR and compare repayment shapes (interest‑only, bullet, amortizing). When fees are unavoidable, negotiate caps or rebates—especially on larger tickets where fixed costs scale poorly.
Exit Planning: Refinance vs Payoff
Pick a structure that matches your exit path. If you expect to refinance, avoid heavy prepayment penalties and design an early release workflow for titles or custody. If you plan to sell, prioritize amortizing structures that track asset decay and reduce balloon risk at maturity.
Case Study
A small business owner pledges inventory valued at $280,000. The lender applies a 18% haircut and offers 48% target LTV. The borrower weighs two quotes: 10.5% nominal APR with 3% origination vs 12.0% with 1% origination and lower storage. Normalizing both to the same term reveals the second quote is cheaper by roughly 120–180 bps effective APR.
To manage margin risk, the borrower sets a policy to top up if LTV breaches 60% and keeps a small cash buffer separate from the pledged inventory. A pre‑approved wire path to the custodian shortens cure times from days to hours.
At month 7, volatility increases; the haircut grid widens by 5 points. Because LTV started conservative and the buffer policy is in place, no forced sale occurs. The owner refinances at a lower rate in month 9 after presenting improved documentation.
Expanded Checklist
- Normalize quotes: same term, structure, valuation source and haircut basis.
- Compute all‑in APR including origination, storage, insurance and legal.
- Document trigger LTVs and cure windows in the term sheet.
- Verify custody model, movement policies and insurance certificates.
- Run −15% to −30% stress tests and size cash buffers accordingly.
- Negotiate caps on pass‑throughs; request rebates on larger tickets.
- Align structure to exit plan: refinance or sale; avoid balloon surprises.
- Prepare payoff and release logistics before funding to save time later.
- Keep docs centralized for faster refinancing or audits.
- Track realized volatility and liquidity; adjust LTV headroom proactively.
Glossary
- Haircut
- Discount applied to collateral value to cover volatility and disposal costs.
- Trigger LTV
- Threshold where the lender can request more collateral or partial repayment.
- Cure Period
- Time window to satisfy a margin call before liquidation rules apply.
- Perfection
- Legal step (e.g., UCC‑1, lien on title) that makes the security interest enforceable against third parties.
- Custody
- Who holds and controls the asset; includes segregation, audits and movement policies.
- All‑in APR
- Effective annual cost including rate and all fees, normalized to a standard repayment shape.
- Rolling Average
- Valuation method that smooths spot price by averaging past observations.
- Liquidity Depth
- How much size a market can absorb at tight spreads without moving price.
Overview
Erken ödeme vs uzatma kararında toplam faiz, ücretler ve fırsat maliyeti aynı çerçevede hesaplanmalıdır.
Uzatma ücreti düşükse ve oran farkı küçükse, vade uzatmak nakit akışı için daha sağlıklı olabilir.
Why this matters
Ön ödeme cezaları, efektif APR'ı beklenenden daha yüksek yapabilir.
Örnek amortizasyon tabloları kararı sayısal hale getirir.
How to approach
Worked example (mini calculation)
Example: Collateral $120,000, haircut 20%, target LTV 50%, APR 12%, term 12m.
Net collateral = $120,000 × (1 − 0.20) = $96,000. Max loan at 50% LTV = $48,000.
Scenario analysis
- If price drops −15% while APR accrues, LTV may breach sooner than expected—plan a buffer.
- Auction‑based liquidation often clears faster but at lower recovery than retail.
- Extending the term can lower monthly cash out but raises total interest—compare total cost.
Comparison table
| Collateral | Typical Haircut | Start LTV | Notes |
|---|---|---|---|
| Gold | 10–25% | 40–55% | Audited custody; deep market |
| Vehicle | 20–40% | 35–50% | Title lien; condition & resale |
| Crypto | 30–60% | 25–45% | Qualified custody; auto‑liquidation |
Common pitfalls
Erken ödeme vs uzatma kararında toplam faiz, ücretler ve fırsat maliyeti aynı çerçevede hesaplanmalıdır.
Uzatma ücreti düşükse ve oran farkı küçükse, vade uzatmak nakit akışı için daha sağlıklı olabilir.
Ön ödeme cezaları, efektif APR'ı beklenenden daha yüksek yapabilir.
Checklist
- All‑in APR (rate + fees) yazılı alın.
- Trigger LTV ve cure sürelerini doğrulayın.
- Değerleme kaynağı ve yenileme sıklığını sözleşmeye yazın.
- Custody/insurance kapsamını belgeleyin.
- Örnek payoff/erken ödeme hesapları talep edin.
- Acil nakit tamponu ayarlayın.