Commercial Loan Rate | Understanding Commercial Loan Rate Risk in Long Term Fixed Rate Loans
Commercial lenders make their money through both fees and interest. Fees are based on the company – while some fees are mandatory, others are chosen by lending companies based on the way they complete loans. But the commercial loan rate – while it can be influenced by specific companies – is usually based on risk. Lenders set the rate based on credit risk, financial risk, and – in some cases – time.
The Risks of Time on Commercial Loan Rate Profits
If you are looking for a fixed rate loan, the longer the loan the more likely you’ll have a higher rate. That is because, for banks, there are many inherent risks in a long term loans compared to shorter term loans. These risks include:
- Long Term Company/Personal Health – The longer a loan the longer the person has to be successful to pay it off. Very few businesses remain successful and active for 30 years. Similarly, you also run the risk of suffering from health problems, and the older you get the more at risk you are for default.
- Property Depreciation – That same amount of time also may lower the value of the property. While property prices may go up (which is why it is a valuable investment), the asset itself could become damaged, experience weather or accident problems, and so on. These make it less valuable as collateral, which in turn puts more risk on the lender.
- Decreasing Value of Money – Profit margins for banks also go down as the property gets older. A $30,000 payment today will be much more valuable than a $30,000 payment 30 years from now because of inflation, so in order to profit the lender needs to have more money coming in.
- Liquidity – Every dollar provided to someone else is a dollar that cannot be provided to another borrower. The longer it takes the pay back, the less money is coming back into the lender for them to provide to other borrowers.
All of these issues cause commercial loan rates to be higher the longer the fixed rate interest loan. Indeed, if lenders could get away with it they would make interest rates even higher to guarantee profits and mitigate risk, but that may also make it harder to pay back the loan and put the borrower at risk for default.
At CRE Lender, we know how important it is to make the right decision with your commercial mortgage, and deciding on the best way to structure a loan is a part of that. That’s why we connect you to information on numerous lenders, as well as customizable options for your property purchase. If you’re interested in learning more about our commercial lending services, make sure you sign up today.
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