Billboard Loan Fees and Their Impact on Financing Costs

Am amazed how often borrowers begin a conversation with me by saying "what's your interest rate?"  Interest rates are important, but you also need to take into account loan fees and prepayment penalties in computing the total cost of a loan.

I typically charge a 2% loan fee, a 1% transaction fee and an interest rate of prime plus 6% with a floor of 12% for a five year commitment.  There is no prepayment penalty and no success fee or exit fee.  The annual cost of one of my loans is 12.6% computed as follows:

Annual interest rate:                                  12.00%
Annual cost of fees (3%/5)                            0.60%
            Annual Cost of Loan                       12.60%

Here is a loan structure which I have seen several times in the industry from another lender.  The interest rate is 11.5% for a three year commitment.  It appears cheaper but there is a 5% loan fee due in the beginning of the loan and a 3% exit fee due at the end of the loan.  The annual cost of this loan is 14.16% calculated as follows:

Annual interest rate:                                    11.50%
Annual cost of fees (8%/3)                             2.66%
             Annual Cost of Loan                       14.16%

Conclusion: Look at all costs when trying to decide what loan is your best option.