The average farm land loan interest rate in the US is currently at least 300 basis points higher than the average from 2015 to 2019. Now more than ever, you need to secure a favorable rate to minimize your borrowing costs and keep your farm financially viable.
How do you do that? In this guide, we talk about 10 ways to secure low-interest land loans for your farm.
But first: Factors that influence your land loan rate
The length and setup of your loan have direct effects on your interest rate. As you probably already know, shorter loan terms usually carry lower rates with higher monthly payments, whereas longer terms come with higher rates but more manageable monthly payments.
Beyond this fundamental determinant, several other elements affect your land loan rate. The biggest influences are your credit history and your collateral.
Strong credit scores and clean credit histories mark you as a low-risk borrower and can open doors to better financing options. Making a larger down payment and/or a wider range of high-value collateral can also lessen your loan’s riskiness in the eyes of the lender and may result in lower interest rates.
External market conditions, which you have less control over, can also have a decisive effect on the final interest rate. Borrowing costs for farm loans increase in a high-interest-rate environment and decrease when rates are low — that’s just the way the economy operates.
10 Strategies to secure the best land loan rate
There’s no way to control the current land loan rate environment, but you can certainly take proactive steps before you apply for a loan to secure the lowest interest rate possible:
- Boost your and your farm’s creditworthiness.
- Pay all bills on time — including utility payments for your farmhouse, feed supplier invoices, equipment leases, and other farm-related expenses, alongside personal financial obligations.
- Reduce outstanding debts like personal loans and farm-related debts (such as equipment financing or operational credit lines) to lower your debt-to-income ratio.
- Keep balances low on credit cards used for farm-related expenses as well as personal cards. Make sure to stay well below the credit limit.
- Regularly check credit reports for both personal finances and farm-related credit accounts. Resolve any errors or potential red flags immediately.
- Maintain a mix of credit types specific to your needs, such as personal credit cards and loans along with farm-focused financing to demonstrate that you are a responsible borrower.
- Shop around for farm loans. If you’re not in a hurry, take the time to explore different farm loans and pit their associated costs against each other. Evaluate their interest rates and fees. You can use a comparison spreadsheet to keep organized and track each offer’s details so you have a quick snapshot of the best terms available.
Apart from fees, you can also consider the qualitative aspects of potential lenders like their focus on relationships and how well they understand agricultural finance. Lenders who specialize in farm loans may be open to negotiating more flexible payment terms and providing personalized financial advice. You can also evaluate lenders based on their responsiveness.
- Keep your personal and farm financial records organized.
Prepare your farm’s profit and loss statements, annual crop yield reports, and equipment depreciation schedules to give lenders a clear picture of your operation’s financial health. When you have organized records for both personal finances and farm activities (such as loan repayment history, operational budgets, and tax returns), lenders will see that you have the ability to manage both personal and farm-related finances. A lender familiar with agriculture can then use this information to assess your farm’s strengths and work toward offering you the best possible land loan rate.
- Prepare a comprehensive business plan.
Get ready to present a well-thought-out business plan detailing your farming techniques. In this report, make sure to set clear production targets and outline your marketing strategies. You also need to forecast your financial performance. The goal is to show lenders that you understand the agricultural market and that you have a clear plan for financial success, so include detailed revenue projections and list the strategies you intend to use to manage potential risks.
- Tap into government programs.
Depending on your circumstances, you may qualify for government programs designed to support farmers. These programs often provide loans and grants with lower interest rates and flexible repayment schedules to ease your financial burden.
For instance, the USDA Farm Service Agency offers programs like Direct Farm Ownership loans that can cover up to 100% financing for farmers intending to purchase land or expand their operations. Direct Farm Ownership loans offer up to $600,000 in financing or $300,150 for the Beginning Farmer Down Payment program. Farm Loan Officers and Managers service these loans locally. Funding is provided through Congressional appropriations under the USDA budget.
- Explore alternative lending options.
Don’t just stick to traditional banks for your loan needs. Be sure to look into alternative lenders such as credit unions, community development financial institutions, online lenders, and private commercial lender. These types of lenders often have more flexible criteria and might offer competitive rates that are better suited to the agricultural sector.
- Many credit unions cater specifically to rural communities and agricultural businesses so they offer lower fees and interest rates. They also understand the specific challenges farmers face and are open to more flexible repayment options or assistance during difficult seasons.
- You can also explore community development financial institutions that serve underbanked or underserved communities, including farmers and agricultural entrepreneurs. Many of them provide educational resources and financial counseling to help you succeed long-term.
- Online lenders may be worth a look, too, if you need fast access to capital. Their application processes are streamlined and their approval times are often quick. These platforms rely heavily on technology to assess the creditworthiness of borrowers and usually offer short-term loans or equipment financing, which can be especially helpful during planting or harvest seasons.
- And then of course there are private low-interest farm loan lenders like us here at Private Capital Investors. Unlike banks, private lenders who understand the agriculture business are willing to work with farmers on terms that traditional institutions might not offer. You can expect a high level of flexibility in structuring loans. You may be able to customize repayment schedules to match your harvest cycles or seasonal income, for example.
Broadening your search lets you find more favorable farm loan interest rates and terms that match your business model.
- Build relationships with lenders.
Try to establish a personal connection with loan officers at your local banks or credit unions. When loan officers personally know you as a responsible and trustworthy borrower, they may be more inclined to offer you more favorable loan terms.
You can also participate in agricultural finance workshops and farmer networking events to meet and connect with potential lenders and other farmers who can tell you about their own financing experiences. The goal is to get to know potential financing sources on a personal level. After all, strong personal relationships can pave the way for better communication and trust during the loan negotiation process.
- Offer additional collateral.
Secure your loan with tangible assets to provide a safety net for lenders and get more favorable interest rates and terms. You can make yourself look less risky by offering additional collateral such as farm equipment, livestock, or even farmland. Make sure to get your assets professionally appraised to confirm their market value.
- Show that your cash flow is stable.
This all boils down to maintaining up-to-date and precise financial records that demonstrate your farm’s ability to generate enough income to cover all operational costs and loan payments. Make it a habit to continuously update financial documents (such as your profit and loss statements and cash flow forecasts) to reassure lenders that your farm is healthy and stable. This strengthens your loan application and helps you get lower farm loan rates.
- Choose a shorter loan term.
Consider choosing a shorter loan term if it’s financially feasible or if it makes sense to do so. Evaluate your financial projections to see if a shorter loan term could be sustainable, as it could save you money in the long run and free up your financial resources sooner.
If you’re financing the purchase of a $3,000,000 piece of farmland, here’s how different loan terms may impact your total costs:
- If you choose a 10-year loan at 4% interest with a monthly payment of approximately $30,374, you’d pay about $644,880 in total interest over the 10-year term.
- In contrast, if you choose a 20-year loan at 5% interest with a monthly payment of around $19,799, you’d pay approximately $1,751,760 in total interest over the 20 years.
This example is oversimplified, of course, but it shows the glaring difference in interest payments. The 20-year loan will reduce your monthly burden by $10,575 but will cost you over $1.1 million more in interest across the life of the loan. If your cash flow can sustain the higher monthly payment, the shorter loan term saves you a lot of money and allows you to pay off your farm loan sooner.
Discuss your options with Private Capital Investors.
Private Capital Investors can assist you in obtaining farm financing across the United States. Explore the farm loans we offer here, and don’t hesitate to get in touch to know more.
