When seeking a commercial loan, the typical U.S. consumer is swept up in the promotional rate of the loan. Unfortunately, the rate is seldom the whole story. Current commercial loan rates can be misleading because they may be accompanied by a list of hidden or improperly explained charges, and maybe both. The trick is not that the lender is attempting to deceive the borrower, although that may happen, but it is definitely doing the trick when it comes to lining the lender’s pockets. Here are five fees that are being charged for current commercial loan rates, and how you can calculate the real price of the loan you are considering.
1. Origination Fees
Charges that are widespread and not usually understood are origination fees. An origination fee is the cost of developing a loan and is typically calculated as a percentage (0.50%-2.00%) of the borrowing amount to reimburse a lender for the work done to close the loan. An example of this would be if a lender advertised a 1% origination fee on a $500,000 loan ($5,000), you would pay at closing. In many cases, even with the lowest interest rates, when including the origination fee, the overall APR becomes elevated.
2. Underwriting and Processing Fees
Underwriting fees basically cover the expenses of checking your financial stability, creditworthiness, and general risk. These can be named as “processing,” “credit review,” or “administrative” fees in your loan documents. Underwriting fees, if not big, still increase your overall debt cost. A lot of borrowers don’t notice them when looking at the current commercial loan rates nowadays, but they have a real effect on how affordable the loan will be.
3. Appraisal and Third Party Report Fees
Sometimes, commercial loans will require appraisals, environmental studies, and property condition analyses. Though the above expenses are incurred by a third party, it is almost always the responsibility of the borrower to pay them. Based on the type of property and location, these fees range from a few thousand dollars to over $10,000 on average. This further adds to the cost, which is the driving factor behind the current commercial loan rates.
4. Prepayment Penalties
It should also be mentioned that certain loans come with penalties for paying them off early. These penalties help safeguard the profits that the lender makes, and they may result in a significant loss of flexibility for the buyer when they refinance or sell the property. If the loan rates are lower than current commercial loan rates, but have severe penalties for prepayment, it may end up being costlier than one with slightly higher rates and no restrictions related to repayment. This is one aspect of commercial loan terms that should be reviewed meticulously.
5. Continuous Payment and Maintenance Fees
Payment services or servicing fees are regular monthly fees that help a lender manage your loan, including: receiving payments, maintaining escrow accounts, and monitoring Compliance. Although these payments may seem small on an individual basis, they can also build up over time and significantly increase the total cost of using the current commercial loan rates when they are used over a long-term basis.
How to Calculate Your Real Payment?
Figuring out the real cost of your loan is a lot more than just looking at the interest rate. A better way to do it is to figure out the APR:
- Take all your upfront fees (this could be origination, underwriting, appraisal, etc.) and add them.
- Add your regular expenses (service fees, required reserves).
- If there are penalties or balloon payments, include those as well.
- Take the total cost and divide it by the loan amount.
- Then, annualize the figure over the loan term.
Such a figuring-out reflects the actual cost behind current commercial loan rates, and it is the method that allows you to compare the offers without any bias. Quite a few borrowers find out that two loans with the same stated rate have vastly different APRs.
Why This Matters When Comparing Lender Offers
Commercial loan owners charge fees in varied arrangements. One commercial loan lender may charge lower interest rates with higher upfront fees. Another lender may charge simple fees. By focusing instead on the APR and not just the rate, the consumer obtains clarity and leverage, and this can be significant, for example, when negotiating the prevailing commercial interest rate with competing lenders.
Conclusion
The published loan interest rates should not be a determining factor. There may be hidden charges associated with the current commercial loan rates, and these charges can greatly affect the interest rate. You can therefore settle for a loan rate that may appear favorable initially, but the charges can make it quite expensive. A smart borrower will ask not only for the best available interest rate but will also ask how much the loan will really cost him or her.