How to Read Financial News When It Comes To Interest Rates
As a business owner, you look for smart ways to save money wherever possible. You can put the funds you save to better use when you invest them in business needs. That’s why the question of fixed versus variable interest rates is important when applying for SBA loans. Should you choose a fixed-rate small business loan or opt for variable rates?
What Is the Difference Between Fixed and Variable SBA 504 Loans?
Fixed interest rates don’t change during the life of your loan. They remain locked in at the value established when you sign the loan agreement. Variable interest rates adapt with market rates, potentially dropping if U.S. interest rates go down, or rising if the economy spurs rate hikes.
Some bank loans only provide one option or the other. In the case of SBA 504 loans, though, you can decide whether you prefer fixed or variable rates. The choice you make can potentially save you a lot of money, especially over 25-year terms for real estate or heavy machinery.
Which Type of Interest Is Better?
Purely from an average-cost point of view, variable interest rates tend to be a better option in the long run. Over time, businesses tend to reap the benefits from drops in interest rates more than they lose from increases.
In practice, that’s not always the case, though. There are two situations when you’re probably better off going with fixed interest for property purchases with SBA loans.
First, if the market is experiencing an abnormally-low interest rate period when you sign up for your loan, you should take advantage of it. Locking in an exceptional interest rate that is unlikely to return in a long time can save you a considerable amount of money on your purchase.
Second, if the market has experienced a long period of low-interest rates and seems poised to swing strongly in the opposite direction, you may want to avoid paying significantly higher rates for several years. This second situation is more tricky to predict, and it requires paying attention to the news.
How Can You Understand News Trends?
Don’t panic because of minor waves regarding rate hikes. Some rise in interest rates is to be expected, a decrease in the years or decades to come. If analysts believe rates will rise sharply and stay there for 5–10 years or more, though, that’s a sizable portion of SBA loans. By locking in better rates right now, you can avoid the worst effects of high interest.