Farm Loan Interest Rates

Farm Loan Interest Rates

Farming is a long-standing tradition of people, with evidence that it began approximately 12,000 years ago in the fertile crescent. The current scientific belief is that as time progressed, people became less nomadic and began to transition from hunter gatherer societies to agricultural and food production societies.

Farming has come a long way in that time period, particularly in the United States, where agriculture not only is an important part of our history, but also makes up a large portion of our economy.

Farms are considered the basic facility in food production and are areas or tracks of land that are devoted primarily to agriculture and its processes.  The primary objective in farming is the production of crops and other food. There are, however, many different types farms and of farming.

Most often when people think about farms, particular types of farms such as vegetable, livestock, and dairy farms come to mind. However, farming goes far beyond that. It is also inclusive of feedlots, orchards, fish farms, flower farms, honey, and even wind farms.

The products produced or manufactured on these farms make their way to the American table, or to other farmers, or even as commodities for other industries. These are just a few of the many different farming specialties being carried out today.

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Farm Loan Types

For anyone who may want to start any of the above kinds of farms or produce farming commodities, chances are you will need some financing. The United States Department of Agriculture (USDA) has several different types of loans available through the FSA, Farm Services Agency.

These loans are available to a wide-array of applicants, for a variety of farm types. They have funding set aside for women and minority farmers, small and large operations, and youth farmers as well. These loans can help cover farm damage, expansion, and other day-to-day farm operating costs and expenses. Outside of the USDA, banks, brokers, and individual lenders can also help you attain financing.

Anytime you borrow money, no matter whether the lender is a bank, broker or the USDA, you will have to pay an interest rate, but what does that mean?

Farm Loan Interest Rate Breakdown

Well, farm loan interest rates can best be described as proportions of the principal that are charged as a percentage of the outstanding loan. This is a fee assessed by the lender to the borrower for the use of their assets. Most interest rates are assessed on an annual basis and are known as the annual percentage rate.

How does a bank or lender come up with their farm loan interest rates for the borrower? That depends on whether they are low-risk or high-risk party. The lower-risk a borrower is deemed to be, the lower that their interest rate will be, depending on the markets.

Farm loan interest rates are assessed by a lender as a compensation for loss of the capital’s use. Basically, this means that if a lender invested the money or used it themselves, as opposed to lending it out, they could have generated an income, especially on a large amount of money.

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How Are Farm Loan Interest Rates Determined?

They typically are assessed using three separate pieces of information. The first, which impacts not only the U.S., but can affect other countries is the Federal Reserve. This is the central bank of the United States and they set the feds funds rate. This is what affects short-term and variable interest rates.

The second is the investor demand for U.S. Treasury notes and bonds. The reason this is important it because they affect long-term and fixed interest rates.

Lastly, farm loan interest rates are determined by the banking industry itself. It is because they offer loans and mortgages and can charge interest rates depending on their business needs.

Farm Loan Interest Rate Terminology

There is some terminology you should learn before applying for loans to help you understand any farm loan interest rates you may qualify for.

The first is LIBOR.

LIBOR stands for London Interbank Offered Rate and is a benchmark rate that banks charge each other for short-term loans. For the U.S., this charge is on overnights loans that help meet the Fed’s reserve requirements and is typically just a few tenths of a point higher than the Feds rate.

Next is Prime Rate.

This is the rate that a bank will charge its best customers. Typically, it will be just above the Feds fund rate, but below the average variable interest rate. Variable interest rates are just as they sound.

They are rates that can change over the lifetime of the loan. A fixed interest rate is one that is pre-determined at the beginning of the loan and does not change over the lifetime of the loan.

Typically farm loan interest rates are fixed for a 15 or 30-year term. They are usually associated with consumer loans and are slightly higher than the prime rate, but lower than revolving credit. Son once your loan rate is determined, how is it calculated?

There are typically two types of equations, simple and compound, used when calculating farm loan interest rates and the type used is determined by the details of each loan.

Simple interest is calculated by taking the principal (the amount of capital borrowed) and multiplying it by the number of periods in a loan as well as the interest rate itself.

Compound interest is a little different. Not only does interest accrue on the principal that you borrowed, but also on any interest accumulation during previous periods.

Currently according to the USDA, their loan rates which would also apply to farm loan interest rates, effective as of July 1, 2017 are outlined. For a direct or microloan for farms, rates vary between 2.875% and 3.875%.

A direct operating loan is one used to purchase items for your farm. This includes equipment, fuel, chemicals, livestock and feed, or repairs to buildings and general operating expenses.

Microloans are a similar type of operating loan, but geared towards small and beginning farmers. These farmers are typically non-traditional, niche and specialty crop operations.

For a farm ownership loan that is a direct loan, with joint financing, current rates are 2.500%.

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Farm Ownership Loan

For a farm ownership loan with a qualified down payment, a rate of 1.500% is attainable. Lastly, for an emergency loan that would help cover the amount of actual loss, a current rate of 3.750% is available.

An emergency loan is just as it sounds. They are there to help ranchers and farmers through times of loss. This can be a tangible loss or production loss due to flooding or drought, quarantine, or natural disasters.

Whatever type of funding you decide you need to start, operate or expand your farm, knowing about interest rates and loans can help you make sure you are getting the best loans and farm loan interest rates for your situation. Through brokers, banks, and lenders will be there to help you through your loan process, being armed with as much knowledge and information as you can prior to borrowing, can ensure you are starting out your farm with success.

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