Churches are commercial enterprises, but lending to churches is different from lending to businesses. Every church is unique with different needs, missions, and goals. Therefore, the right lender should identify with the ministries’ faith, understand its requirements, and then suggest the right financial solution.
Banks and credit unions used to lend to commercial entities treat churches too as just another business and may not have the best interest in mind. It is essential to choose a lender that specializes or has experience in lending to churches and ministries. Shopping for church loans can be daunting as there are different dynamics of commercial lending that you need to be aware of.
Here are some essential things you should know when shopping for church loans.
Don’t Go for the Lowest Interest Rate Offer
While it’s tempting to go with the lender that offers the lowest rates, it may not always be a good idea. It is crucial to think about the risk aspect too. Lenders often provide the lowest rates with shorter loan tenure. This means that the lender’s risk is less because he expects the loan amount plus interest to be paid back with a brief period.
On the other hand, the borrower’s risk is high because shorter tenure would mean larger monthly payments to pay off the loan on time, which would put a strain on their finances, refinancing at the end of the term or face loan default.
There Is No Such Thing as Fixed Rates
In commercial lending, there is no such thing as a fixed rate and is deceiving. When lenders offer a fixed rate, they usually shorten the mortgage term to 3 or 5 years, which means that the rate is fixed for those years.
Unless you manage to pay off your loan within that period, you are given another rate for another term. It means the lender is adjusting the rates till the borrower manages to pay off the loan. The arrangement benefits the lender more than the church.
Therefore, it is always a good idea to go with long term financing of say 20 years or so. Here, the interest rates adjust several times, but there is a cap on how the rates can increase, so you have a fair idea.
Repeated Refinancing is Not a Good Idea
Refinancing, again and again, means you have to pay interest rates, and your amortization starts again every time. A better idea is to opt for long term financing where even if the rates adjust, there is a cap.
Assess How Much Can You Borrow
Do not borrow more than what you can afford. Consider your donation and offering income only when assessing your repayment capacity. You don’t want to refinance your church loans at the end of every term and push your ministry further into debt. The idea should be to borrow just enough money that you can pay off as quickly as possible.
As you search for a loan solution, the above homework should stand you in good stead in dealing with lenders for the best financial solution.
