I had a nice chat with a client this week about the prime rate and whether or not to leave their commercial loan of credit tied to prime, or to get a fixed rate. The downside to getting a fixed rate is that the current fixed rate is higher than their current variable rate, which is prime + 1.5%. It is important to note that in almost all cases a variable rate tied to prime will be lower than the same loan with a fixed rate, that is just how it works. So, you should ask yourself a few questions:
- Will prime go up (prime is at it’s lowest point since 1954)?
- How quickly can I reduce the balance of my commercial loan?
- How does an increase in the prime rate effect my companies cash flow?
- How’s does converting to a fixed rate effect my companies cash flow?
Understanding the answers to these questions will help you make a better decision about how to handle your commercial loans tied to the prime rate.
Click the prime rate chart below to see a bigger version:
Click the link below to download an excel spreadsheet complete with all of the historical prime rate data.