Settling a Facility Early: A Worked Example of When It Pays

Paying off a facility early feels obviously good. A calculation showing when it is and when the money is better used elsewhere.

Clearing an obligation early has an emotional appeal that often outweighs the arithmetic. Sometimes the arithmetic agrees. The example below separates the two so the decision can be made on both, knowingly.

The situation

A borrower has received a lump sum and is considering whether to settle part of an existing facility early or to deploy the money elsewhere.

Assumptions (illustrative)

• Outstanding balance: SAR 260,000.
• Remaining term: 7 years.
• Assumed remaining total payments if unchanged: SAR 338,000.
• Lump sum available: SAR 100,000.
• Assumed early settlement cost on the amount settled: SAR 2,500.
• Assumed alternative return available on the lump sum: 5 per cent per year.
• All figures are illustrative assumptions used to demonstrate the method.

Step 1: Cost of the facility over the remaining term

SAR 338,000 less SAR 260,000 equals SAR 78,000 of cost remaining.

This is what you are paying for the remaining seven years, and it is the figure early settlement reduces.

Step 2: Effect of settling SAR 100,000

Settling roughly 38 per cent of the balance saves approximately SAR 30,000 of that cost on these assumptions, less SAR 2,500 settlement cost, giving about SAR 27,500.

The saving is real and certain, which distinguishes it from a return that is expected but not guaranteed.

Step 3: Alternative use of the lump sum

SAR 100,000 at 5 per cent over seven years, without compounding for simplicity, produces about SAR 35,000.

On these assumptions the alternative appears better, but it carries risk while the settlement saving does not.

Step 4: Risk-adjusted comparison

The settlement saving is certain. The alternative return depends on the investment performing as assumed for seven years.

A certain saving of SAR 27,500 is not obviously worse than an uncertain SAR 35,000. The comparison depends on what the alternative actually is.

Step 5: The liquidity question

Settling converts liquid funds into reduced obligation, which cannot easily be reversed if cash is needed.

Once used for settlement, the money is not available for an emergency. Keeping a reserve often matters more than either option.

Step 6: A middle approach

Settling SAR 60,000 and retaining SAR 40,000 as reserve captures much of the saving while preserving liquidity.

The decision is rarely all or nothing, and the partial approach is frequently the most defensible.

What changes the answer

• A higher cost of finance strengthens the case for settlement considerably.
• Settlement costs vary by facility and can materially change the calculation.
• If the alternative return is uncertain or illiquid, the certain saving becomes more attractive.
• Holding no emergency reserve makes settlement the riskier choice regardless of the arithmetic.

What the numbers tell you

• Compare the certain saving against the risk-adjusted alternative, not the optimistic one.
• Check the settlement terms of your specific facility before assuming a saving.
• Preserve an emergency reserve before settling anything early.
• Consider partial settlement, which often captures most of the benefit while retaining flexibility.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If you are weighing a financing decision, Domira can review the offers, model the total cost and stress test the obligation with you before you sign anything.