Loans come at a heavy price, with the cost of funds - also referred to as loan rate or interest rate - ranging from just below 18 per cent to about 26 per cent.

Some commercial loans tend to be cheaper, with rates now hovering at 12-13 per cent and more.

But no matter the loan segment, finding the cheapest loans often requires shopping around at various banks and other lending institutions.

Be warned, however, that the interest rate, though important, is not the only determinant of the best loan deal.

Waldon Wright, business line and special-projects officer with Churches Credit Union, says the borrower should take the time to establish all the related transaction fees, then compare processing and registration fees and other costs across the board.

A focus on interest rates alone might blind one to the fact that other charges might make the loan much more expensive than another with higher rates.

How the monthly payments are calculated is also important.

A 10 per cent add-on rate, for example, is likely to result in higher monthly payments than a 10 per cent loan that is calculated on the reducing balance.

Informing yourself about the range of loans offered by institutions is also a good place to begin, even before making that appointment to meet the loan officer.

cheaper rates

Locally, banks offer credit to small- and medium-size entities at cheaper rates than other commercial loans, but often, it is up to the borrower to request funds from that facility.

Be warned that in such cases, it is up to the borrower to satisfy the bank that the business is viable, that it is capable of turning over enough income to service the loan.

The Development Bank of Jamaica (DBJ) also lends to businesses through lines of credit to approved financial institutions.

The DBJ's approved lenders include commercial banks, to which it "wholesales" funds at about 10 per cent for lending at a mark-up not exceeding three per cent.

Interest rates tend to vary according to the sector in which the business operates.

Agricultural loans, for example, are usually offered at lower rates than manufacturing ventures, services and retailing.

Loan costs can be reduced as well, Wright says, by adding to your financing-package money, which does not attract interest or more personal equity.

It is obvious that if one borrows less for projects, then the debt would be easier to service.

Said Wright: "Fifteen per cent on $1 million is naturally more than 15 per cent on $800,000. Very often, people do not want to put anything up at all."

For the portion that you must borrow, however, you may also seek preferred or lower rates if the collateral you provide is cash or near cash. Some banks do offer better rates for this kind of security.

The type of collateral you offer will also affect loan fees, including that of registering documents. Mortgage attracts a lower registration rate than a bill of sale, for example.

Your loan officer will also be considering the viability of the project in assigning risk.

good rates of return

The loans for ventures that carry more risk will tend to be priced at a higher interest rate.

If sales are already good and you have cash coming in regularly, and if your project is sustainable, with good rates of return on the investment equal to or greater than inflation, the risk of lending will be estimated to be lower, and some companies will offer a lower interest rate.

But, not all do, reinforcing the importance of shopping around for the best terms. It is called doing due diligence.

Banks and credit unions will also factor 'willingness to pay' into whether they give you a loan, and at what rate.

"Sometimes, there is capacity to pay, but no willingness," said Wright.

Establishing 'willingness' is a qualitative judgement.

Lenders will base the assessment on character references, credit rating, and how you have serviced previous loans. They may also look at payment of rent and other bills.

A related consideration is stability of tenure, measuring how long one has resided at a particular location. Higher points will be awarded the longer and more certain one's period of residence.

Some credit unions will also take into consideration the length of time one has been a member of the financial institution.

Within credit-union circles, members with over two years or more get lower interest rates on loans than borrowers who are new.

Some institutions offer lower rates for government workers and certain professional categories, as recovering money from these sources is usually easier.

Researching transaction-fee policy/ rate differences between banks may - scratch that - will, take some time if done properly, but in the end, it will mean saving yourself onerous charges and rates which could otherwise have been avoided.

avia.collinder@gleanerjm.com