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Commercial Loans Secured by Personal Residences and Prepayment Penalties

Commercial Lending Bulletin

Many states have laws prohibiting prepayment penalties on non-commercial loans secured by a borrower's home. An individual borrower may obtain financing in his or her own name to use to invest in or establish a business. Because the loan is in the individual's name and secured by his or her personal residence, the loan may appear on its face to be a personal loan. In order to avoid any prohibition on collecting a prepayment penalty, it is very important for the loan documents to recite that the loan is a commercial loan and describe the purpose of the loan, e.g., to acquire a franchise or purchase a business. An even better approach is to have the business entity as the borrower and the individual proprietors as guarantors, pledging their residences as security for their guaranty of the business loan. 

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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