Interest rates can fluctuate in the same way your business can. So it’s great to have options if the interest rate of your loan goes up and it looks like your business could experience pressure.
You may of course want to stick with your current bank and loan in the hope that the rate will come back down. But hope is not a strong business strategy.
When should you consider refinancing?
The principal reason to refinance a business loan is to reduce your monthly repayments and, ultimately, bring down its overall cost. Securing a lower interest rate from your existing lender or a new one will help to do this. Increasing the repayment term may be an option also. However, you need to bear in mind that increasing the number of months and years over which you want to repay the loan will add to its ultimate cost to you and your business.
Consider all your lender options when it comes to refinancing
While institutions such as Bank of Ireland, AIB, and the Credit Union offer specifically tailored agricultural loans, it is really worth casting your research net as wide as you can. Less traditional options – like online lenders for example – may offer you the kind of competitive rate you are looking for.
Compare the interest rates available
What looks like a small difference between interest rates can translate into significant savings over the course of a loan. You can use online loan calculators or speak to financial advisors to compare the total cost of different loan options. Most financial institutions quote standard interest rates on their websites, so it’s worth checking those out first.
Look at the term and number of repayments on your loan
As mentioned already, your first port of call will be seeking a lower interest rate. But if you want to lower your monthly repayment further, you may consider a longer term. Of course a longer-term loan with lower monthly repayments could result in higher overall interest costs. If you’re thinking of the overall cost of the loan, a shorter-term loan with higher monthly repayments could actually save you money in the long run. It all comes down to your financial goals and cash flow projections, and choosing a loan term that aligns with them.
The table below outlines the potential savings on a loan balance of €120,000 over a 10-year term, comparing 7.5% and 6.5%. In this scenario, refinancing your current loan at a new interest rate of 6.5% would result in slightly lower monthly repayments, but would save you €7,421.46 over the entire term.
| Current Loan (7.5%) | Refinance Loan (6.5%) | |
|---|---|---|
Loan Amount | €120,000 | €120,000 |
Interest Rate | 7.5% | 6.5% |
Loan Term | 10 years | 10 years |
Monthly Payment | €1,424.42 | €1,362.58 |
Total Interest Paid | €50,930.55 | €43,509.09 |
Total Repaid | €170,930.55 | €163,509.09 |
Savings (Interest) | N/A | €7,421.46 |
This next table looks at the impact of extending the loan term and reducing the interest rate too. Increasing the loan term to 12 years at a lower interest rate of 6.5% would result in a lower monthly repayment. But it would also result in higher total interest of €2,201.41 more paid over the life of the new loan compared to the original loan.
| Current Loan (10 years at 7.5%) | Refinance Loan (12 years at 6.5%) | |
|---|---|---|
Loan Amount | €120,000 | €120,000 |
Interest Rate | 7.5% | 6.5% |
Loan Term | 10 years | 12 years |
Monthly Payment | €1,424.42 | €1,202.31 |
Total Interest Paid | €50,930.55 | €53,131.96 |
Total Repaid | €170,930.55 | €173,131.96 |
Savings (Interest) | N/A | -€2,201.41 |
What additional costs do you need to take into account?
Application fees, valuation fees, legal costs, title searches, any penalties for paying off your current loan early… You need to see which of these costs you would incur for the refinancing option you are considering. If these the sum of these costs are more than the saving you will get in return, is switching still worth it? Typically speaking, an unsecured loan will have fewer additional costs than a secured loan (where land, for example, is taken as security for the borrowing). Normally, there would be a minimum legal fee of €2,000 associated with an unsecured loan, but it could be higher.
Always read the fine print
Before signing any new loan agreement, carefully review the terms and conditions, paying particularly close attention to any clauses regarding interest rate adjustments, prepayment penalties, and default provisions. It can’t be stressed enough how important it is that you completely understand your obligations and rights as a borrower.
It’s worth seeking professional advice
Switching loan or loan provider is a big business decision to make, with lots of variables to consider. If you're in any way unsure about your next step when it comes to refinancing, get expert advice from financial professionals who specialise in agricultural lending. A qualified financial advisor can help you assess your options, crunch the numbers, and make an informed decision. If in doubt, farm it out.
Make sure the numbers add up
Switching loans to avail of a cheaper interest rate can be a solid strategic move to make for the good of your farm's financial health. But always check first with your current bank or lender if they would be open to renegotiating your current terms or offering you a better deal. You never know – you might be surprised!
