What the guarantee protects
A short-term lender prices a loan expecting to collect points up front and interest for most of the term. When a flip sells in month two, the points are still there but most of the interest isn't, and the lender's capital is back in the account looking for the next deal. Minimum interest sets a floor under that outcome: the borrower owes at least a stated number of months of interest, whenever the payoff happens.
It's stated in months ("six months minimum interest") and is sometimes called guaranteed interest. LegalClarity, in a May 16, 2026 article on hard money lockout clauses, calls the shortfall owed on an early payoff a "prepayment premium." Once the borrower has paid interest for at least the guaranteed months, the clause has no further effect.
How the calculators show minimum interest
On a $280,000 loan at 12% over 12 months, with interest on the full balance:
| Monthly interest (12% ÷ 12) | $2,800.00 |
|---|---|
| Minimum interest, 6 months | $16,800.00 |
| Scheduled interest, 12 months | $33,600.00 |
| Gross lender revenue (points + fee + scheduled interest) | $39,200.00 |
Revenue doesn't change when you add the minimum, because the estimate assumes the loan runs its full term, and a full term already pays at least as much interest as the guarantee. The minimum describes the floor on an early payoff, which is why the calculators, including the private money loan calculator, show it as a separate Minimum Interest Charge line rather than inside revenue.
Minimum interest on a funded-balance loan
When interest is charged only on money disbursed, the app computes the minimum on the balance funded at closing, the acquisition advance, not on the full commitment. Take a $280,000 rehab loan with $180,000 funded on Nov 2, 2026 and the $100,000 holdback released in three draws:
| Interest method | Balance used | Minimum interest |
|---|---|---|
| Full loan balance | $280,000 | $16,800.00 |
| Funded balance | $180,000 | $10,800.00 |
This matters for two reasons.
- The guarantee matches the money at risk on day one. If the borrower pays off before any draw funds, the lender has only had $180,000 out. Paid off after 63 days, just before the first draw, the loan has accrued $3,728.22 of interest (Actual/365), leaving $7,071.78 to reach the $10,800.00 minimum.
- Draws can cover the minimum before the guarantee period ends. On this schedule, accrued interest reaches $10,800.00 on day 157, Apr 8, 2027, ahead of the six-month mark on May 2, 2027. After that date the clause no longer adds anything.
A lender who expects six months on the full commitment would be looking for $16,800.00, not $10,800.00. The note decides which balance applies. If your documents compute it on the full loan, use the full-balance figure.
The early-payoff premium
The calculators stop at the minimum itself. What the borrower owes at an early payoff depends on how much interest has already been paid. LegalClarity (May 16, 2026) describes the calculation as the guarantee months × monthly interest, minus interest already paid, and works a $300,000 loan at 12% with a six-month guarantee: paid off after two months, the borrower has paid $6,000, owes a minimum of $18,000, and pays a $12,000 premium.
Applied to the $280,000 loan above, assuming interest is paid monthly on the full balance and nothing else is owed at payoff:
| Paid off after | Interest paid | Premium | Total interest |
|---|---|---|---|
| 1 month | $2,800.00 | $14,000.00 | $16,800.00 |
| 2 months | $5,600.00 | $11,200.00 | $16,800.00 |
| 3 months | $8,400.00 | $8,400.00 | $16,800.00 |
| 4 months | $11,200.00 | $5,600.00 | $16,800.00 |
| 5 months | $14,000.00 | $2,800.00 | $16,800.00 |
| 6 months | $16,800.00 | $0.00 | $16,800.00 |
| 7 months | $19,600.00 | $0.00 | $19,600.00 |
Paid off after 2 months, the premium is $11,200.00. From month 6 on it's zero. Notes differ on the details: whether partial months count, whether a sale and a refinance are treated alike, and how the clause interacts with any interest reserve. Work it from the actual language.
Minimum interest vs prepayment penalty vs exit fee vs extension fee
These four charges get mixed up on term sheets. They overlap in purpose, but they're triggered by different events, and only one of them is modeled here.
| Charge | What it is | When it's owed | In the calculators |
|---|---|---|---|
| Minimum interest | A guaranteed number of months of interest | Only if the loan pays off before that much interest has been paid | Yes: months × monthly interest, shown separately |
| Prepayment penalty | A charge for repaying principal before a date set in the note, for example a percentage of the balance repaid | Payoff inside the penalty period | No |
| Exit fee | A fee due when the loan is repaid, stated as a percentage of the loan or a flat amount | At payoff, early or at maturity | No |
| Extension fee | A charge to push out the maturity date, for example a percentage of the balance per extension period | When the borrower extends the term | No |
The practical difference: minimum interest and prepayment penalties only bite on an early payoff, while an exit fee is owed whenever the loan ends, so it behaves like back-end points. If a program has an exit fee, add it to your own revenue estimate; the calculators count only points, the flat lender fee and interest.
Writing minimum interest into a quote
A one-line "6 months minimum interest" leaves questions open. A clear quote answers:
- How many months are guaranteed, and from what date they run.
- Which balance it's computed on: the full loan or the amount funded at closing.
- Whether interest already paid counts toward the minimum.
- Whether it applies to every payoff: sale, refinance, or acceleration after a default.
- How it interacts with any interest reserve, exit fee or extension.
The hard money term sheet guide walks through a complete one-page preliminary quote. For a lender's view of how the guarantee fits with points and interest, see how much hard money lenders make.
Loan documents and state law decide
Educational only, not legal advice.Whether a minimum interest, prepayment or exit provision applies, how it's calculated and whether it's enforceable depends on the loan documents, the type of loan and borrower, and the law of the state where the loan is made. Rules can differ for consumer and business-purpose loans. Have counsel prepare or review your forms before you rely on any of these terms.
To see the minimum alongside monthly and scheduled interest for your own numbers, use the hard money interest calculator.
Questions
What is minimum interest on a hard money loan?
A guarantee that the lender collects a set number of months of interest even if the borrower pays the loan off early. Six months of minimum interest on a $280,000 loan at 12% is $16,800.00.
Is minimum interest the same as a prepayment penalty?
They do similar work but are written differently. Minimum interest guarantees a number of months of interest; a prepayment penalty is a charge for repaying before a set date. LegalClarity calls the shortfall on an early payoff a prepayment premium. The loan documents define which applies.
Is minimum interest added to the scheduled interest?
No. It's a floor, not an extra charge. In the calculators and the app it's shown on its own line and never added to scheduled interest or gross lender revenue. If the loan runs at least 6 months, the minimum is already covered by the interest paid.
Is minimum interest calculated on the full loan or the funded balance?
In the app, it follows the interest method. With full-balance interest it's months × the full loan's monthly interest. With funded-balance interest it uses the balance funded at closing: $10,800.00 instead of $16,800.00 in the example on this page. Loan documents can define it differently.
Do the calculators compute a payoff premium?
No. They show minimum interest as months × monthly interest. The payoff premium depends on when the loan actually pays off and on how the note credits interest already paid, so this page works it by hand as an illustration.
Can minimum interest be longer than the loan term?
Not in the app or the calculators: the minimum interest months can't exceed the loan term. A guarantee longer than the term would make little sense, since the loan is due at maturity.