If you are seeking for a commercial loan, it may be useful to understand how banks set commercial interest rates, which plays a big role in determining what your payment scheme will be, and the total amount you will have paid when you have settled everything. Let’s look at how commercial loan rates are set by the banks.
When you first look at the banks’ system of determining the rates, it might appear very simple. The bank earns a profit that comes from the difference of the money that is paid to them in interest on loans and the interest that they pay customers who deposit money into the bank.
In the simplest terms, it is the difference between interest paid in and interest paid out. This seemingly simple system becomes complicated when you add in the many types of products and loans that are factored into the equation that ultimately determines the rate you will pay for your loan.
Banking Policy Regarding Interest
Banks are very often in control of the amount of interest they pay to a customer who deposits money in their bank, but not completely. Although they have the power to set their own interest rate, what is actually set is determined by the competition, as it is necessary for the bank to remain competitive or stand to lose customers. Very often, their power to set the interest is thwarted by the competitive market place.
Government’s Influence Over Interest
Often, it is the government that will sway the amount of interest that is required for various types of loans. Some governments set certain interest rates and control them by selling bonds, which helps determine the interest rate at many levels. This government control is seen as a factor that stimulates consumer buying and the safety of the banking system. Most countries that use an open market system employ similar tactics.
In addition to the factors made by the government, inflation rates, factors related to other countries, and even stock market trading are all considered in determining the final rate. Once these factors are calculated, it is used for the final numbers you receive when applying for a commercial loan.
The measure of the difference between what the bank pays and what it receives on interest of loans is known as the NIM. The bank reports on this number each quarter of the year. Their intent and purpose is to drive their NIM up for each report. The most common formula used is for the banks to use rates that are based on short-term loans from customers in the form of deposits to their bank. It then looks to use those resources to loan to consumers and businesses in the form of long-term rates.
An academic study concluded that business loan interest rates were particularly influenced by the GDP and the rate of current inflation. This study went on to conclude the interest rates became volatile when there were strong fluctuations in the market place.
When a prospective customer or business seeks a loan, their credit worthiness will of course have great influence over the interest rate that gets charged. If a business has perfect, or near perfect credit then there is a high probability that they will pay the loan. Banks have also found that those who have bigger down payments are more likely to pay even during difficult times, because they have enough investment that they are not willing to just abandon things and run away.
Banks will consider factors such as the collateral being put up if any, the length of the loan, and other points that help determine if the loan can be approved and at what rate.
It is often recommended for businesses seeking sizeable business loans to seek out a loan broker. In Australia, the top commercial loan broker is CommercialLoans.com.au. They have the experience to know which banks are highly likely to approve you and which ones you do not have a chance at. They have the expertise to know whom to deal with to help you get the loan you need.
