Commercial Loans Interest Rates History Chart and Trends

Commercial loans have been a staple of business financing for decades, and understanding their interest rates is crucial for entrepreneurs and business owners. Over the years, commercial loan interest rates have fluctuated significantly, influenced by economic conditions, monetary policies, and market trends.

Historically, commercial loan interest rates have been influenced by the Federal Reserve's actions, with the prime lending rate serving as a benchmark. In the 1980s, the prime rate peaked at 21.5%, while in the 1990s it averaged around 8%. The Great Recession of 2008 led to a sharp increase in commercial loan interest rates, with some rates reaching as high as 18%.

The chart below shows the significant fluctuations in commercial loan interest rates over the years.

Commercial loan interest rates are influenced by several factors, including the prime rate, which is currently 8.50% as of July 2024. This rate can impact the rates offered on commercial mortgages, which typically range from 5.58% to 15.37% for fixed-rate mortgages.

The loan-to-value (LTV) ratio also plays a crucial role in determining interest rates for commercial mortgage loans. A lower LTV, such as 70%, can lead to better interest rates for borrowers.

Interest rates on commercial mortgages can be tied to indexes like the prime rate or the 5-year Treasury rate, and changes in these indexes can affect loan rates. For example, if the Fed raises interest rates, loan rates tend to rise.

Bridge loans are used for short-term financing, typically lasting 6-36 months, to renovate and re-stabilize an investment property. These loans are usually higher interest rate loans.

The interest rates for bridge loans vary depending on the term. For a 6-month term, the floating rate is 6.00% - 12.00%. For a 12-month term, the floating rate is 6.50% - 12.50%.

Here's a breakdown of the terms and rates for bridge loans:

* Not available for all property types or areas; may calculate using LTC instead of LTV

** Interest-Only

These rates and terms are not suitable for all businesses or investment properties, so it's essential to understand the specifics of each loan before applying.

The Annual Percentage Rate (APR) is a crucial concept to understand when it comes to commercial loan interest rates. It's the total cost of borrowing money expressed as an annual percentage, including interest rates and additional fees or charges associated with the loan.

The APR provides a more accurate representation of the actual cost of borrowing compared to just the interest rate. This is because it takes into account all the costs involved, giving you a clearer picture of what you'll pay over the life of the loan.

To give you a better idea, average rates for fixed-rate mortgages typically range from 5.58% to 15.37%. This wide range is influenced by various factors, including the prime rate and the loan-to-value (LTV) ratio.

Here's a breakdown of how LTV can affect your interest rates:

By understanding the APR and how it's calculated, you can make more informed decisions about commercial real estate financing and avoid hidden costs that can add up over time.

The SBA doesn't directly set business loan rates, but it does use the Prime rate as a benchmark. The Prime rate is the interest rate banks charge their most creditworthy customers.

Lenders often consider various factors, including the borrower's credit score and financial history, when deciding on an interest rate. Most lenders don't rely solely on SBA loan rates, but rather use their own methods to assess risk and market conditions.

Banks and credit unions are primary sources for commercial loans, but borrowers often need a strong credit history to qualify. A high minimum credit score, usually around 680, is often required by banks.

Commercial interest rates are calculated in a variety of ways depending on the lender's internal cost of funds. This means that different lenders may use different methods to determine the interest rate for a loan.

The most common way a lender calculates an interest rate is by taking an index, such as LIBOR, treasury, swaps, or FHLB, and adding a "spread" to that index. The spread is what the lender makes off of the loan.

For example, if a lender is pricing at LIBOR, which is currently at 0.000 + 2.00%, the interest rate would be 2%. This is a straightforward way for lenders to calculate interest rates based on a widely recognized index.

Residential properties typically have much lower interest rates available than commercial properties.

The term and amortization on a residential loan usually match, such as 30/30. This means the borrower won't have to refinance or pay off the loan early.

Commercial loans, on the other hand, often have a shorter term than amortization, like 7/25. This can cause the borrower to refinance or pay off the loan, or even sell the property, before the end of the loan term.

Residential loans are typically used for single-family dwellings with 4 units or less, whereas commercial loans are used for larger properties.

Commercial loans often involve property terms that can be complex and confusing. One key term to understand is "Loan-to-Value" (LTV) ratio, which is typically between 60% to 80% of the property's value.

The LTV ratio determines how much of the property's value the lender is willing to finance. This means that if you're purchasing a $100,000 property with an 80% LTV ratio, you'll need to come up with a 20% down payment.

Amortization period can range from 5 to 25 years, depending on the loan type and lender's requirements. A shorter amortization period typically means higher monthly payments.

Interest rates can vary significantly, but commercial loans often have fixed interest rates, which can range from 4% to 10% per annum. This can provide stability and predictability for the borrower.

Prepayment penalties can apply if you pay off the loan early, which can range from 1% to 5% of the outstanding loan balance. This is usually waived if the loan has a prepayment clause.

Construction loans are used for substantial rehabilitation, redevelopment, or ground-up construction of a property. Interest rates can range substantially depending on the lender, property type, market, and loan product.

For construction loans with a term of 6 months, floating rates range from 9.50% to 13.00%. This means you'll need to be prepared for a relatively high interest rate if you're planning a short-term construction project.

Construction loans typically allow for a maximum loan-to-value (LTV) ratio of 75% for owner-occupied or investment properties. This means you'll need to have at least 25% of the property's value in equity.

If you're looking at a 12-month construction loan, the floating rate increases to 9.65% to 13.50%. This is a slight increase from the 6-month term, so be sure to factor this into your project budget.

Here are the floating rates for different construction loan terms:

Construction loans with longer terms tend to have higher floating rates, so it's essential to carefully consider your project timeline and budget when selecting a loan product.

The Small Business Administration (SBA) offers a range of loan options for businesses, but it's essential to understand how their loan rates work.

The SBA does not directly set business loan rates, instead using the Prime rate as a benchmark, which changes based on economic conditions.

The SBA provides loan guidelines, but doesn't control the rates lenders charge, each lender assessing risk and market conditions before deciding on an interest rate.

There are various types of SBA loans, including the 7(a) and 504 loans, with different maximum interest rates.

Here's a breakdown of the maximum interest rates for some popular SBA loan programs:

The SBA 504 loan program has a maximum LTV of 90% for owner-occupied properties, and can be used for construction or existing properties.

The SBA 7(a) loan program has a maximum LTV of 85% for owner-occupied properties, and can also be used for various business purposes, including working capital.

The Debt Services Coverage Ratio (DSCR) is a key factor in determining business loan rates. A higher DSCR indicates a lower risk for lenders, potentially leading to lower interest rates for the business seeking a loan.

A DSCR of 1 or higher is generally considered acceptable, but lenders may view a higher ratio as a lower risk. This can result in more favorable loan terms and lower interest rates.

A lower DSCR, on the other hand, may result in higher loan rates due to the increased risk perceived by lenders. This can make it more difficult for businesses to secure loans at competitive rates.

Commercial loans can be a great way to access the capital you need to grow your business. They offer flexible repayment terms, which can be a huge advantage if you're not sure how much cash you'll have coming in each month.

One of the biggest benefits of commercial loans is that they can help improve your cash flow and liquidity. This can be especially important if you're a small business owner who's struggling to make ends meet.

However, commercial loans also come with some significant drawbacks. For example, they often have high interest rates compared to other forms of financing.

In addition to high interest rates, commercial loans can also be difficult to qualify for. You'll typically need a good credit score and a strong financial history to be approved for a loan.

If you do get approved for a commercial loan, you'll need to be careful to make your payments on time. If you're unable to repay the loan, you could risk losing the collateral you used to secure it.

Here are the pros and cons of commercial loans in a nutshell:

Commercial loans come in various forms, each with its own set of characteristics and benefits. Business term loans are a common type of commercial loan where a fixed amount is borrowed for a specific period, typically with a set repayment schedule.

Businesses can choose from different types of commercial loans, including equipment financing, business lines of credit, working capital loans, and commercial real estate loans. Commercial real estate loans are specifically designed for businesses or commercial real estate investors looking to purchase or renovate property for commercial purposes.

The interest rates for commercial loans depend on several underwriting factors, including the property and borrower location, loan-to-value (LTV), debt service coverage ratio (DSCR), property usage, property type, and the borrower's financial strength. The rates can range from 5.50% to 16.5% for SBA 7(a) fixed interest rate loans, and up to 13.25% for SBA 7(a) variable-rate loans.

Here are some key characteristics of different types of commercial loans:

Commercial loan options can be overwhelming, but understanding the different types can help you make an informed decision. Business term loans are a common type of commercial loan where a fixed amount is borrowed for a specific period, typically with a set repayment schedule.

Business lines of credit are flexible forms of financing that allow businesses to borrow funds up to a predetermined limit. This can be a cost-effective option for businesses that need quick access to capital for short-term needs.

Working capital loans are a type of commercial loan designed to help businesses cover their day-to-day operational expenses. These loans typically finance short-term needs such as payroll, inventory, and rent.

Commercial real estate loans are specifically designed for businesses or commercial real estate investors looking to purchase or renovate property for commercial purposes. These loans typically have longer terms, more significant loan amounts, and higher interest rates than residential mortgages.

Equipment financing is a commercial loan specifically designed to help businesses purchase equipment needed for operations. This type of financing allows companies to acquire machinery, vehicles, technology, or other essential tools without paying the total cost upfront.

Here are some of the most popular types of commercial loans, along with their typical interest rates and terms:

SBA loans are government-backed loans designed to help small businesses access financing with favorable terms. Participating lenders provide these loans, which can be used for various purposes, such as starting a new business, expanding an existing one, or purchasing equipment.

SBA 504 loans are a type of SBA loan that can be used for the financing of owner-occupied real estate and/or machinery and equipment. LTVs go up to 90% and may be used for construction or existing properties.

Commercial real estate loan rates can range from 2% to 18%, depending on various factors such as creditworthiness, loan type, and terms. The type of loan and size of the loan also affect the interest rate.

For example, a Small Business Administration (SBA) 504 Loan typically has an interest rate between 2.2% and 2.4%. In contrast, a Hard Money Loan can have an interest rate as high as 18%.

If you're looking to finance a commercial property, it's essential to consider the loan type and terms that suit your needs. Some common commercial loan types and their current interest rate ranges as of 2021 include:

Keep in mind that these rates are subject to change and may vary depending on your specific situation. It's always a good idea to consult with a commercial real estate expert to determine the best loan options for your needs.