The effect of interest rates on cost also seems obvious. A higher interest rate means you pay more in interest.
Fortunately, SBA loans have some of the most competitive interest rates out there. Due to program rules, SBA loan rates can only go so high. In fact, the SBA sets very specific interest ranges. We won’t bore you with the exact math, but these rates are based on three factors:
- US Prime Rate
- Loan term length
- Loan amount
Your interest rate will depend on those factors and the type of SBA loan you get. Your personal credit rating can also affect your rate. But with the SBA’s specified rates, you can feel confident you’re getting a good deal.
As with your interest rate, your loan term will depend on the type of SBA loan you get. SBA Express loans have terms between 5 and 25 years, for example, while SBA 504 loans have repayment terms between 10 and 20 years.
As we just told you, your loan term length will affect the SBA rate you get. But that’s not the only way your term affects your total loan cost.
A longer term means you’ll be paying interest longer. To see this in action, consider a $100,000 loan with a 5% interest rate. If you have a one-year term, you’ll pay $2,728.97 in interest. But bump that term up to five years, and you’ll pay $13,227.34 in interest.
That’s not to say that long repayment terms are bad. Longer loan terms give you lower monthly payments. On that same $100,000 loan, a one-year term would have a monthly payment of $8,560.75, while a five-year term would have a monthly payment of $1,887.13.
You shouldn’t necessarily plan on early repayment to save money either. SBA loans have prepayment penalties, or fees for early repayment.
The final piece of your loan-cost puzzle is the fees. As we mentioned above, SBA loans can come with various fees, like these:
- Packaging fees
- SBA guarantee fees
- Referral fees
- Other bank closing costs
Again, these will often be a percentage of your loan principal. The SBA also has acceptable ranges for these percentages depending on loan type.