What is double dipping when renewing a business loan or cash advance?

Paying Double for the Same Money

Double dipping is when some or all of the unaccrued (or not-yet-earned) interest gets added to the payback on the renewed loan. It’s also known as interest on interest, fees on fees and interest acceleration. Many lenders do it. It can cost tens of thousands of dollars over the course of a long relationship with the wrong kind of lender. It’s also most common in cash advances and short-to-medium term loans.

Double dipping occurs when you renew or refinance with the same lender. You’ll get new money, but a portion of that goes to pay off the old balance, including interest that hasn’t accrued yet. That means you’re paying double for the same money. More importantly, it raises the effective price of every dollar borrowed from that lender. Find out how your potential provider deals with this before you sign the initial deal.

This is a tricky one. It’s hard for a non-expert to figure out on their own. Nearly every cash advance does this. So to make it easy, we’ll use an example of a loan. Something as simple as a loan is much easier to understand, especially with a fixed payment over a set term and a set amount to pay back.

Say you have a $100,000 loan at $130,000 payback and the payment is $2,500 weekly over 12 months. Most lenders require you to have 50% paid on that loan before you can renew. Let’s assume you are 51% paid on it. 51% means you have paid back just over half of the loan and the interest tied to it. You still owe the rest of the balance, though. Here is where the loan stands:

The original $130,000 payback balance consists of the $100,000 loan and $30,000 in interest. The remaining balance has $49,000 in principal and $14,700 in unaccrued interest. These are unaccrued or not earned yet, so you’re not responsible for them. Let’s say that there is no origination fee and you renew the full $51,000.

That $14,700 gets charged to the new loan amount. It means it’s double dipped.

You still have to pay interest from that $49,000 principal going forward. That $14,700 also gets rolled into the new loan. We’ll multiply it by the same 1.30x factor rate and get $19,110. $19,110 is what you owe for $14,700.

It’s the same dollar amount whether you choose 3, 6 or 12 months. Any fixed repayment contract will yield this result.

Protect Yourself

Loan contracts don’t always share whether you’ll double dip on renewal. Most won’t make it easy to understand, so make sure you weigh this cost before you sign the first deal. Don’t wait until you’re ready to renew before figuring the cost into the mix.

This is a complex topic and very few lenders bother to explain how it really works. Also, many contracts never bother to mention renewals. Before you sign for your first loan, ask the question, what happens if I want more money later? and then ask flat out if they double dip.

Don’t sign anything until you’ve gone over the contracts in detail. Know every term, no matter how confusing. If you’re renewing a loan, ask these questions.

The first thing you should do is ask for a loan breakdown of your proceeds and closing cash you’ll actually get after all the fees. Then get a breakdown of the payback amount. Get an itemized breakdown showing how much of the new money is going to the balance of the old loan. Don’t skimp on details.

Make sure that the value of the unpaid interest isn’t added or deducted from the new loan. Be wary of “unpaid fees” or “factor income” or “contract amount” or “margin income.” Regardless of what it’s called, ask that it only be principal that is deducted off of the renewal. If the lender only talks to you in terms of “contract value,” they probably double dip. Otherwise only the remaining principal is subtracted.