Are you currently paying off an SBA loan and wondering how rising interest rates could affect your monthly payments? Or, maybe you are considering getting an SBA loan but are worried that increases in interest rates will mean you have to pay back more than you are anticipating. Whichever the case, in this article we will explain how interest rates work, how SBA loans respond to rising interest rates, and give a general idea of what kind of rise you could expect in your loan payments in the next several years.
Why SBA Loan Payments Are Affected by Rising/Falling Interest Rates
Most SBA loans, including 7A loans which are specifically for small businesses, have variable interest rates. This means that the interest rate on your loan can rise or fall based on what the overall market climate is for interest rates. Most people use the Wall Street Journal's prime rate index, a summary of the rates of the 30 largest lending institutions in the United States, as a general guide when discussing overall interest rate trends. So, as the prime rate falls or rises, the interest rate on your SBA loan will fall or rise as well, although often not as dramatically as the prime rate increase. It all depends on where you are in life of your loan, which we will discuss below.
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Are Interest Rates Expected to Rise?
As with any future financial projections, trying to guess what interest rates are going to do in the next several years is not an exact science. However, the overall consensus of many interest rate specialists is that interest rates will rise slowly, between 2-5% in the next 10 years. If this is the case, the question then becomes, how will an interest rate increase impact your loan payment, and therefore your wallet?
How Much Will Rising Interest Rates Actually Affect My Monthly Loan Payment?
Let's assume that the prime rate will rise around 5% in the next 10 years. Does this mean that your monthly loan payment will be 5% higher? The answer is, probably not. Interest rates rarely make significant jumps over night. It is more likely that rates will increase 1% or so in the first several years, and then 2-3% over the next 8 years or so.
When you first begin paying off your SBA loan, you are primarily paying down interest. As you get close to the end of your loan term, you are mostly paying down principal. The only way your monthly loan payment might be significantly affected, is if the prime rate would jump significantly in the first several years of your loan, which is unlikely. If the interest rate jumps in the last year or two of your loan term, it will have minimal impact, because the interest portion of the loan is already payed off.
Example: So, how much is my monthly payment actually going to change?
Let's say you pay $1100/month for your SBA payment. If interest rates would happen to rise 2% in the first year of your loan, then your payment would probably reflect that, rising to around $1122 or so per month, which could add up over the life of the loan. However, if rates rise 2% in the last year or two of your term, it will be more like ¼% difference, to around $1100.75, which is peanuts.
All in all, it is not worth getting too worried about rising interest rates jacking up your SBA loan payments. Unless the prime rate goes up 4-5% in the first couple years of your loan, which does not seem likely, the actual monetary impact on your monthly payment is really pretty minimal.