At base, the effect of APR on your loan is simple: a higher APR translates to a higher loan cost. But there’s more you should know about APR.
In fact, let’s clear something up right now: APR and interest rates are not the same thing. APR, or annual percentage rate, is meant to describe the full cost of your loan over a year. That means that interest rates are just one part of APR; loan fees make up the other portion.
So let’s look at interest rates first. Commercial real estate loans have some of the lowest interest rates you’ll find on business loans, in part because the real estate itself serves as collateral for your loan. In fact, you can find commercial loan rates as low as 3%, while they cap out around 15%. Not a bad deal, right?
The interest rate you get depends on a few different things, including your lender, your personal credit score, your business credit rating, and the term length of your loan. But mostly, you just need to know that the more qualified you are as an applicant, the better rate you can get.
But remember, APR is more than interest—it also includes the fees you’ll pay. Commercial loans have all sorts of fees; your loan may include several of these:
- Origination fees
- Appraisal fees
- Loan application fees
- Survey fees
- Annual fees
- Legal fees
So before you close on your commercial business loan, make sure you get a full list of fees from your lender.
There’s one more tricky thing you need to know about APR: points. Commercial mortgages, much like personal mortgages, sometimes express APR like “6% plus two points,” though obviously the numbers will change. So what are those points?
Put briefly, those points (sometimes called discount points) are extra money you pay at closing to get a discount on your loan rate. And oh, by the way, the discounted rate in the example above is the 6%. The undiscounted rate would probably be 6.5%.
Each point costs 1% of your loan amount. So for example, one point on a $500,000 loan would be $5,000. If you’re offered an APR of 6% plus two points on that loan, that means you’d have to pay $10,000 (two points) to get that 6% rate. The exact discount per point can vary from lender to lender. So again, don’t sign anything without clarifying your APR with your lender.
Term length is less complicated than APR, so we’ll keep this quick. If you have two loans with the same APR, the loan with the longer term will cost more overall (since you pay interest over a longer time period).
Keep in mind that commercial loan term lengths can vary a lot, depending on what kind of real estate you’re buying with your mortgage loan. You’ll commonly see commercial loan terms from 5 to 20 years.
Of course, you can always use a loan calculator to see exactly how term length affects the overall cost of your small-business loan.