Did you know that about one-quarter of US farms carry land loans or some other form of debt? The USDA’s Economic Research Service forecasts that total farm sector debt will hit a staggering $535 billion in 2023.
And sadly, rising interest rates and increased debt levels pile on the financial pressure for farmers. Interest expenses now rank as the third-largest cost of production and account for an astounding 7.4% of expenses.
When adjusted for inflation, this represents a 19.1% increase from $28.43 billion in 2022 and a 38.9% rise from $24.37 billion in 2000.
But don’t let these numbers discourage you. When managed wisely, land loans can be practical tools for obtaining the capital you need to achieve your goals faster and increase profitability.
You must also secure the best land loan rate to make the most of this financial strategy.
Why do land loan rates matter?
Your land loan rate has a direct impact on your borrowing costs. It affects both your monthly payments and the total amount you’ll repay over the life of the loan — which ultimately affects your farm’s overall financial health.
Even a 0.5% lower interest rate can mean serious savings. Think about it: If you take out a $3,000,000 land loan for 30 years at an 8.0% interest rate, your monthly payment will be about $22,606.
But if the rate is 7.5%, your monthly payment drops to approximately $21,108. That’s a difference of $1,498 per month, which adds up to $17,976 over a year and a whopping $539,280 over the life of the loan.
Imagine slashing 1% off your land loan rates, going from 8.0% to 7.0% on a $3,000,000 land loan. Your monthly payment would decrease significantly. At an 8.0% interest rate, your monthly payment would be approximately $22,606.
But if you lower the rate to 7.0%, your monthly payment drops to about $19,877. That’s a difference of $2,729 per month — and it adds up to $32,748 over a year or a staggering $982,440 over the life of the loan.
So, how do you get the best rates on land loans? In this guide, we’ll help you understand how interest rates are calculated and how to secure the most favorable terms.
What factors influence interest rates on land loans?
Four key factors affect land loan rates: the loan term, the collateral you provide, your credit history, and the current market conditions. Let’s dive into each of them
Land loan terms and structure
The length of your loan affects your monthly payment and the total interest you need to pay over the life of the loan. Shorter terms can mean higher monthly payments but lower total interest. In contrast, longer terms have lower monthly payments but higher total interest.
The structure of your land loan (e.g., amortized, interest-only) can also impact your monthly payments.
Amortized loans have both principal and interest payments, while interest-only loans only pay interest during the initial term. You can use free online land loan rate calculators to see how different rates impact your monthly obligations for amortized and interest-only loans.
Regarding terms and structure, the best choice depends on your farm’s financial situation and what you intend to do with the money. For instance, if you anticipate a boost in crop yield and are confident you can handle the higher payments, you might choose a shorter term with lower rates.
However, suppose you’re concerned about potential fluctuations in the agricultural market or are uncertain about your farm’s ability to produce a stable income in the next few years. In that case, a longer term with lower monthly payments might be more prudent.
Collateral and down payment
If you offer substantial collateral and make a larger down payment, the lender may consider you a lower-risk borrower. This puts you in a position to negotiate favorable terms and lower interest rates.
Credit history and score
A strong credit score makes you a low-risk borrower and opens doors to more financing options with competitive rates.
As a farmer, it’s worth doing your best to maintain a solid credit profile to save thousands over the life of your land loan. But don’t worry — if your score needs work, you can improve with smart financial moves. We will discuss this in the next section.
Current market conditions
The overall economic climate also affects the interest rates lenders can offer on land loans. Borrowing costs for land loans will rise in high-interest-rate environments. Conversely, you can lock in a reasonable rate during low interest rates to reduce your long-term financial burden.
How can you lower the interest rate on your land loan?
You can’t control the land loan rate environment, but you can take steps now (before you apply) to secure the best rates. Here are three strategies you can do right away.
1. Improve your creditworthiness.
Boosting your creditworthiness is one of the most effective ways to score a better land loan rate. Here’s how to enhance your credit score:
- Make it a point to pay all your bills — including farm loans, equipment leases, and input suppliers — on time or before the due date. Use online banking or mobile apps to stay organized and avoid late payments. The goal is to build a strong payment history to show lenders you’re reliable.
- Next, reduce your existing debts to lower your debt-to-income ratio. A lower ratio tells lenders that you can manage your finances well.
- Limit your credit card balances to a small percentage of your available credit. Try to lower your utilization rate to 30% or less.
- Regularly check your credit report for errors and fix any discrepancies right away. Small mistakes can hurt your score.
- Diversify your credit types by using both installment loans and revolving credit. For instance, you can take out installment loans to purchase farm equipment or land and then use revolving credit for farm supplies and variable expenses. As long as you pay the dues diligently, having a combination of loans shows responsible borrowing and helps boost your credit score.
- Finally, increase your payments to lower the loan-to-value ratio. A lower ratio means that the amount you owe on your loans is a smaller percentage of the value of your farm assets. It demonstrates financial stability and makes you a more appealing borrower in the eyes of land loan lenders.
2. Compare land loan offers from different lenders.
Be bold and shop around to evaluate all costs (including interest rates and extra fees) and find the best deal. But remember to look beyond the numbers. Ask yourself:
- Does this lender understand agriculture and this industry’s unique financial needs? A lender with a solid grasp of the agricultural sector can often provide better advice and tailored solutions than a lender without experience.
- Does this lender value relationships over transactions? You want to work with a lender focused on partnership and can support you long-term.
- Is this lender responsive? Do they provide clear answers to your questions? Good communication is essential for a smooth sailing-lending experience.
3. Keep your financial documentation organized.
When your financial records are in order, it’s easier to give your lender a clear picture of your farm’s finances and highlight your operational strengths. This ultimately allows you to negotiate better rates. So take the time to regularly update your financial balance sheet, even if you don’t expect to take out a loan anytime soon.
What other factors affect farm loan affordability?
Your interest rate is indeed the most significant factor in determining how affordable your farm loan is, but it’s not the only factor to consider. Loan fees can also cause your overall loan cost to increase.
- Origination fees are fees charged by lenders for processing your loan application. Expect these fees upfront. They can add quite a lot to your loan’s total cost, so be sure to factor them into your calculations.
- Some loans come with prepayment penalties, which means you must pay a certain amount (usually a percentage of the outstanding balance or the interest rate differential) if you decide to pay off your loan early. Make sure you are aware of these terms before you sign anything.
- Be aware of other additional costs, such as appraisal fees and late payment charges, which can also impact your overall loan expense.
Get low land loan interest rates with Private Capital Investors.
Securing a good deal on land loan rates can lower your monthly payments and overall loan cost and help protect your farm’s financial health.
Here at Private Capital Investors, our team of commercial real estate hard money lenders is dedicated to supporting farmers throughout the US.
We understand finance and agriculture’s cyclical nature, so we offer customizable loan structures designed to help you thrive during good times and find peace of mind during challenging periods.
Ready to explore our land loans? You can rely on us to use our industry expertise and relationship-focused approach to give you clear and honest guidance throughout the process.
