When borrowing money, remember that interest rate is not the only thing to consider (and not even the most important thing sometimes).  When thinking about the “price” of money, price includes the interest rate, but price doesn’t include only the interest rate.  When thinking ‘price’ you really have to consider all the things that you might get charged for, including things like the following:

  • How much are the upfront fees (sometimes called ‘documentation fees’, ‘origination fees’, ‘transactions fees’, etc.)?  If these fees are as a percentage of your loan amount or a flat amount, then it could make a real difference. For instance, if a fee is 0.5% of the loan amount, on a $100,000 loan that’s $500.  But a competitive lender might offer a $500 flat fee, which is the same dollar amount in this instance.  But, if the loan goes up to $125,000 and the flat fee lender keeps the same $500 fee while the other lender still charges the 0.5% fee, that new fee is $625, and that may make it easier to make a decision on which lender to go with.
  • Can you finance these fees and include them in the loan? (I say “loan” but it might be a lease so in cases where it doesn’t matter whether it’s a loan or a lease, I’ll usually just write ‘loan’).  Most lenders will finance their own fee (so you’ll end up paying interest on it), but some won’t so you’ll have to pay it out of pocket and in advance.
  • How much are the fees if you end up paying out early?  This can be a lot, and if might be a big determinant of if you’re going to go with one lender over another.  If it’s a floating rate loan, a lot of times there are no payout penalties, but sometimes (and more frequently as lenders decide they don’t want you to payout early and so lose all the revenues they might have made over the remaining term of the loan) there are fees, and 3 months’ worth of interest on the amount you payout or paydown is common. 
    • For instance, if your loan has $50,000 outstanding and you want to pay half of it early and the penalty is 3 months’ worth of interest and the loan has a floating rate of Prime +2.5% (Prime being at most banks 2.70% at the time of writing so the nominal rate on the loan would be 2.70% + 2.50% = 5.20%/year). The penalty on paying down half of it early would be $50,000 x ½ = $25,000 x 5.20% x (3 months penalty / 12 months per year) = $325.
    • If the loan is a fixed rate loan, a lot of times the penalty is very expensive. Sometimes (especially on leases) the penalty is all the interest you would have otherwise had to pay on the amount you prepaid. In our $50,000 loan example, if the fixed rate is 6% per year, and there are 36 months left on the loan, the amount of interest you’d have to pay on that whole amount over the remaining 36 months is about $4,752.60. If you want to pay down that loan by $25,000 early, your penalty could be as much as half that $4,752.60, or $2,376.30. Obviously that’s a lot more than the floating rate penalty, so keep that in mind when deciding if you want a floating rate loan or a fixed rate loan and if you may or may not want to pay it out early.
    • Payout penalties are a big deal so I’ll have more on them in future posts.

  • What is the fixed interest rate you’ll receive, versus what is the floating rate you’ll receive (as they are rarely the same)?  Fixed versus floating rates is a big topic that I’ll cover in a future blog, and is important for more than just the potential early payout costs as discussed above.
  • How much are legal costs (if any) that you have to pay direct to your (or their) lawyer and can’t finance within the loan? 
  • Are there other external fees?  Fees for things such as appraisals and real estate environmental reviews are common for mortgages, and appraisals are somewhat common for equipment packages that have unusual or quite a lot of equipment, and such appraisals can be expensive.
  • Are there annual fees?  Lots of lenders review their loans annually, and depending on the type of loan, you might have to pay an annual fee when they do that, even if they don’t give you anything more for the privilege (such as more credit, reduced rate, etc.).  Even some credit cards have annual fees (and there is a lot of debate on if it’s worth it to have a credit card with annual fees; more on that in future posts).
  • Are there monthly fees?  Again, depending on the type of lending facility, this could be common.  For instance, a business Line of Credit (“LOC”) that is calculated as being based on margining (securing and calculating) against your Accounts Receivable, there is often a monthly fee associated with the bank calculating your new LOC limit each month.

So, it should be obvious that there are plenty of ways for a lender to charge you for their service, or other fees to accumulate during the process of getting credit.  And, by and large, fees are usually relevant and appropriate to the service provided or the cost (or value) in providing them.  But remember a couple things:

  • Fees and costs such as those I’ve indicated above are usually negotiable.  Why not simply ask?  If the lender or other service provider doesn’t budge (and lenders are people too so can often be persuaded to be seen as striking a good deal with you, their customer, by making a modest concession on a fee or condition), no harm has been done and at least you tried.
  • You have to add in all the fees/costs of doing a deal with one lender (and over the lifetime of that deal) and then compare them with all the fees/costs of doing a deal with the other lenders at the table.  While lenders will rarely have the same non-price factors in their offers of financing to you (such as security required, length of term, and repayment requirements, among other factors), to make a valid comparison of financing options, you should at least be able to calculate the total cost of one lender versus the total cost of the other.

There are so many ways that InfoFact can help you help yourself when working on getting financing for equipment, inventory, working capital, mortgages, lines of credit, credit cards, and other credit needs you have.  On a regular basis, we're going to be providing a new concrete, usable tip that you can use to help you prepare by giving you ways to improve how lenders see your credit worthiness and your financial strength, how you can improve the terms you get on existing and new credit facilities, and how you can choose between all the various options there are out there and get the best deal for you and your circumstances.

InfoFact Capital Inc.
Edmonton Edmonton, AB T6M2C5 CA
Phone: 780 993 9408 Website: https://www.infofact.ca/

How to Borrow Money in Canada