How Loans Can Be Bad for Your Church

in Church Bonds, Church Financing, Funding my church

The Loan Arranger

Whenever a church begins a construction project, renovation project, or purchases property for a new church facility, and doesn’t have enough money to pay for these projects, often a church will seek a conventional bank loan. Most people are familiar with residential mortgages, but since a church is a non-profit organization, churches require a different type of mortgage or loan, commonly known as a commercial loan. By comparison, the length of time until the loan matures, the interest rate and the repayment schedule are three features that set a commercial loan apart from a residential mortgage.

I’m listening, but how can loans be bad for my church? 

Okay, we will get to that in a moment. To better understand why considering various church financing options are an important issue when looking for a financing solution, we need to look at the way a commercial loan works.

With certain types of residential mortgages, the interest rate and repayment schedule or amortization can vary, but in many cases those interest rates and amortization schedules are fixed for up to as much as thirty (30) years of the mortgage loan. In other words, in the case of a thirty (30) year fixed-rate mortgage, that is 360 months of paying the same payment amount until the mortgage loan is retired, or paid back. On the other hand, with a commercial loan, the interest rates and repayment schedules are different from a residential mortgage. The stated interest rate and amortization schedule are not fixed. In the case of a commercial church loan, in the beginning, the amortization schedule may be set for as many as twenty (20) to twenty-five (25) years, but the church loan usually will come up for renewal or become due after the first three (3) to five (5) years. The final payment on the renewal or due date is what is referred to as a “Balloon Payment”. When a church’s balloon payment comes due, the church is faced with the decision to either refinance the existing loan at what can be a higher interest rate and payment, or search for a new loan with another lender.

So while the initial interest rate and loan payment of a commercial loan can be enticing, it can also end up costing the church much more in the long run.

In the next article, we will discuss Church Bonds as an alternative to a conventional commercial bank loan.