Disadvantages of Farm Loans

Farm loans can come either through a private lender or the Farm Service Agency. Private lenders and government lenders will have different qualifications and loan terms, but ultimately you will face some similarities in a loan contract no matter which option you approach. Both contracts will involve an interest rate, partially control your farm & activities through loan terms and carry consequences in the case you default on your loan.

Cost of Financing

Financing the purchase or expansion of your farm will always cost you more money than making the purchase out right. If you secure the best loan possible, however, it will cost you less than if you secure a loan at a high interest rate. A high interest rate is likely if you provide a low down payment, have a bad credit score or do not meet minimum requirements to secure the loan with your collateral. You may secure a lower interest rate if you have good financial health and are willing to take on higher monthly payments.

The goal is to secure an interest rate very close to the national prime interest rate or inflation rate. When you do this, you may actually save or make money financing the loan instead of paying up front. This is because the money you do not immediately hand over to the bank can be invested and grown in other assets. If you make more by holding on to that money than you pay in interest rates, you will actually save money on the loan. Otherwise, you will pay more, and often much more, through financing.

Restrictive Loan Terms

When you have a loan contract, you will be partially responsible to the lender. The lender will essentially own a portion of your income until the loan is paid off. The lender may also own any asset you place as collateral until the loan is paid off. You will not be able to make modifications to these items under some loan contracts. This means you may not be able to take on additional debt, modify an asset, and other restrictions.

You will also be subject to terms that dictate when you can pay off the loan. If you want to pay off the loan early, modify it, consolidate it or refinance it, you will have to pay penalties and fees.

Risks of Defaulting

Default is the immediate consequence if you do not come through on your promise of loan repayment. Default can result in the seizure of an asset you have placed as collateral. In some cases, this means you will have to forfeit the farm itself. If you do not have enough assets to cover the cost of default, you may even have to declare bankruptcy.

Even if your loan is unsecured, you will face financial consequences in default. The lender can sue you for the outstanding amount. Your credit score will drop and the default will appear on your credit report. You will have a harder time getting financing in the future, and you will have to pay higher interest rates on that financing.